Reply to Bernstein: pitting cities against each other in race for capital will fuel unrest

Amazon recently cancelled its plans to build a second headquarters in New York after a backlash from the local community, who said the tech giant did not deserve the eyewatering $3bn (R42bn) sweeteners. Yet only in November last year the company announced that 25,000 jobs would be going to the city, after running a high-profile nationwide competition for its new corporate campus. The inducements had stirred intense debate about the use of public subsidies and deregulation to lure wealthy corporations.

This couldn’t happen in SA at present because the metros lack equivalent powers and resources to entice businesses. However, if Ann Bernstein’s proposals in last week’s Sunday Times were to be adopted, a culture of territorial competition could take root here too, potentially instigating a race to the bottom between municipalities. The outcome would be the opposite of what she hopes to achieve: “to expand opportunities for all South Africans, especially the 50% of the population who are poor”.

Bernstein advocates several major policy changes to stimulate investment and jobs in our cities. Many of these suggestions seem

reasonable when looked at in isolation, such as greater decentralisation of policymaking to the metros and urban densification. Considered together, however, there are inconsistencies between them and the consequences could be quite damaging.

Her key recommendation is for urban policymakers to put economic growth above social and environmental objectives. Cities are unique places that make people and firms more productive. Therefore, they need to be central to the government’s strategy to accelerate national growth.

The way to get the metros to prioritise growth over wider development goals is to give them big financial incentives and powerful tools to lure private companies.

Cities should also be able to opt out of national legislation and allowed to amend all sorts of statutory regulations to become more business-friendly. This might mean exemption from laws governing workforce protection and the minimum wage, relaxing environmental safeguards and lowering health and safety standards.

These recommendations will have far-reaching implications if put into practice, and therefore deserve careful scrutiny.

First, cities will step up the battle against each other for jobs and investment. They will look for ways of cutting business costs and diluting regulations. Spending could shift from social priorities and household services towards tax breaks to poach mobile businesses. Environmental regulations intended to protect communities from hazards and disasters could be downgraded.

Second, cities with a competitive edge will tend to win out over other cities and towns, and their advantages will become selfreinforcing. The more private investment and entrepreneurial talent they attract, the bigger the incentives they can offer in future. Through this beggar-thy-neighbour process, the gap between winners and losers will widen over time. Rising social discontent in declining areas will fuel stronger populist sentiments and undermine national unity.

Third, the outcome could be divisive within — as well as between — cities as civic leaders seek to deter poor communities because of the financial burden of free service provision. Local growth coalitions will tend to exclude ordinary citizens from decisionmaking, thereby reducing democratic accountability. The pursuit of unchecked property market forces will further marginalise poor communities, who can never compete with more affluent groups for well-located land and housing.

So what’s the alternative? Yes, the metros do need to take their local economies far more seriously. However, the emphasis should be on development from within by exploiting local strengths, encouraging innovative practices and creating environments where capable enterprises can start and succeed, rather than zero-sum competition for mobile investment. Cities should compete on the basis of their distinctive resources and unique assets rather than by undercutting their rivals to encourage business relocation.

Local economic development policies should focus on improving public goods, such as serviced land, better public transport, electronic connectivity, and more reliable water and electricity supplies rather than business incentives and privatisation.

Finally, the metros should build constructive connections with their surrounding regions. Cities require well-functioning rural areas for the supply of food, water, renewable energy, minerals and recreational amenities. Relationships that develop complementary assets and promote mutual benefits will be far more productive and enduring than head-to-head competition.

Turok is executive director in the economic performance and development unit of the HSRC. This piece was co-authored with his colleagues Andreas Scheba and Justin Visagie