Paul Romer on "The Power of the Grid" recently attended a conference at NYU hosted by the Development Research Institute and the Marron Institute of Urban Management on "Cities and Development: Urban Determinants of Success". This is the first post of our four-part series reporting on the event.

Professor Paul Romer started his talk by suggesting that the interventions we have come to associate with international development – like cash transfers, women's self-help groups, deworming, bed nets and better stoves – are not necessarily the big drivers of economic growth and development. These approaches did not play a role in the economic development of rich countries in Europe and North America, so why do we assume they will help countries in the Global South?

Instead, Romer argued that urbanization, as a crucial part of the Global North’s development, is a good candidate for driving development in the Global South as well. He displayed a slide with a series of arrows showing causal links: urbanization leads to formal sector employment (initially in manufacturing), which leads to the acquisition of human capital, which leads to GDP growth, which in turn leads to increased infrastructure.

Romer strongly emphasized the importance of formal sector employment, noting that investments in education have been disappointing for three reasons: (1) building a good school system is hard, (2) it’s hard to improve a school system, and (3) even if a school system is improved, it still takes 50 years to double the stock of human capital in the labor force. He argued that formal sector employment is in fact a better education than going to school, citing a study that showed that all things being equal, business owners in the Global South would much rather hire someone with one year of work experience than with one more year of schooling.

Overall, Romer argued, urbanization is a good thing. He showed a scatter plot of the countries of the world in which higher levels of urbanism correlated with higher GDP per capita. The populations of countries that have become rich have had a shift from working in agriculture, to manufacturing, and then services. Manufacturing and services are more productive in a well-run city. Governments, even relatively weak ones, can be influential in this process of urbanization: they can create, through a minimum level of safety and rule of law, the right conditions to encourage foreign firms to use their city as a manufacturing hub.

One of the keys to successful urbanization is planning. Romer explained that the absence of arterial roads (for sewer lines, buses, etc.) and a lack of public space can completely undermine the success of a city. Using the example of New York City, Romer discussed the 1811 plan in which, although they had no idea what kind of vehicles or buildings would be in use in the future, its authors drew a map that effectively allowed for arterial roads and public space that could serve the city over time. The map, and its grid structure, is still largely in use today. Thirty percent of land was set aside for public space, like streets and sidewalks (in some Brazilian favelas, the percent of public space is as low as five). Romer stressed that governments need to make these decisions early on, as city planning is very difficult to change later (à la Haussmann).

Before the 1811 plan, New York City had shantytowns and informal housing, so its trajectory could be a model for the developing world: it protected public space from the beginning (identifying it before the cost of land is too high), and then built everything on a just-in-time basis and financed it along the way. This process requires a surveyor to draw a map, and the rule of law to protect that map’s plans; citizens cannot be allowed to privatize public resources for their own benefit. This is easier to enforce if citizens have somewhere to build a house; Romer proposed a plan whereby half of land plots would be given away for modest, affordable homes (as with the United States' Homestead Acts), while the other half would be auctioned off to developers for more formal construction.

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