From the earliest times, cities have been centers of democracy, creativity, and economic activity. Why? Economics and geography inform us that density and agglomeration are essential for productivity and growth. Cities also serve as catalysts for collective action, decision-making, and accountability.
The World Bank is putting forth its new Urban and Local Government Strategy at a critical time. For the first time in history more than half the world’s people live in cities. Over 90 percent of urban growth is occurring in the developing world, adding an estimated 70 million new residents to urban areas each year. During the next two decades, the urban population of the world’s two poorest regions— South Asia and Sub-Saharan Africa—is expected to double.
It is estimated that today one billion people live in urban slums in developing countries. Improvement in urban conditions, as demonstrated by many successful programs around the world, shows that slums can become vibrant and well integrated parts of a city, as in Senegal, Singapore, Thailand, and Vietnam. The demands of poverty alleviation, climate change and sustainable growth will put today’s developing cities to the test. An estimated 70 percent of greenhouse gas emissions come from cities and more than 70 percent of energy is consumed in urban areas. This places cities at the forefront of the climate change agenda where denser, more compact cities will be the essential urban form in the years ahead.
The new strategy also inaugurates the Decade of the City, a decade that will be remembered for recognizing cities at the core of growth and human development. Never before has there been so much interest in cities: city associations, citywide programs, cityuniversity and private sector partnerships. In developing countries, cities often provide the first opportunity for elected officials to meet their constituents, governments to collect taxes, taxpayers to demand efficient services, investors to start new businesses. This is where collective voices are heard and accountability matters.

Urbanization is a defining phenomenon of this century, and the developing world is where this demographic transformation is taking place. In the decade since the preparation of the last World Bank urban strategy, the world has become, for the first time, more than half urban. Over 90 percent of urban growth is now occurring in the developing world and nearly two billion people will become urban residents in the next twenty years. In Africa and South Asia urban populations are expected to double during this period. Much of this urban growth is occurring in medium and small-sized cities, with about 53 percent of the world‘s urban population residing in cities of 500,000 or less. This demographic trend raises important questions about the process of managing urbanization and delivery mechanisms for urban development assistance in the decade ahead.

The World Bank‘s portfolio of development assistance, like its member countries, has been urbanizing over time. Since its first urban lending operation was approved in 1972, a sites and services project in Senegal, the Bank has financed investments and technical assistance in more than 130 countries in the six regions and within those countries, in more than 7,000 cities and towns. The urban portfolio has included investment in shelter, infrastructure, slum upgrading, municipal development, local economic development, natural disaster management, environmental improvements, and social services. Today, the portfolio includes more than 155 operations in more than 60 countries amounting to US$10.3 billion in lending commitments.
Upsurge in Urban Lending. After a steep decline in lending in FY2000-01, linked to the overall reduction in overseas development assistance and the Bank‘s shift away from infrastructure lending, the Urban Portfolio7 has rebounded. Today, total lending surpasses any previous volume over the past two decades with the sharpest increase in the most recent two years (FY2008-9).8 Likely contributing factors are (i) increased client demand for urban operations in response to urbanization pressures and the increasing urbanization of poverty, (ii) impact of the Bank‘s Infrastructure Action Plan (FY2004-7), and (iii) an increase in urban analytical work.

A paradigm shift in thinking about urbanization. Urbanization in the developing world was once considered too fast and unmanageable, something to be resisted and controlled. Efforts by many national, state and local governments over the past several decades have been devoted – through various policies and interventions -- to curb or contain it. Indeed, this thinking represents the ―old paradigm.‖ Increasingly, policy makers are recognizing that urbanization is not only inevitable, but also a powerful force in support of economic growth and poverty reduction. The emergence of this ―new paradigm‖ is grounded in the notion that density -- and the urbanization that drives it -- is essential to achieve agglomeration economies and productivity gains. Function, and not size, is the metric by which a city‘s performance should be measured, raising important questions about how to manage the process of urbanization and harness its potential for economic development.
What are the key principles for efficient and inclusive urbanization? The World Development Report 2009 entitled -Reshaping Economic Geography- identifies higher densities, shorter distances and lower divisions as the essential building blocks for economic success. Further, it points out that no country has grown to middle income status without industrializing and urbanizing...

A City System Approach to Urban Development. Understanding urban development through a city system approach represents a departure from previous strategies. Like all systems, a city system is fundamentally dependent on the smooth functioning of its constituent elements. For the purposes of this Urban Strategy we focus on what are the most essential, core elements of the city system – management, finance and governance – all of which fall within the domain of local governments. These three core elements need to function well in order for a city to deliver on its mandate. And when they don‘t the prospects for city residents, particularly the urban poor are worsened. Good management and information systems, coupled with good leadership are fairly ineffectual if not equipped with adequate financing. Similarly, a city without a commitment to good governance and accountability will have difficulty in mobilizing tax revenue from its citizens or financing from the market. While all thematic areas of this strategy are important to cities and urban development, the core elements of the city system remain the most basic and central focus in the decade ahead. In this section, the Strategy examines the three core elements of the city system: management and service delivery, governance, and finance.

Urban poverty is estimated to affect approximately one third of all urban residents, or one quarter of the total poor in the developing world. The share of the poor as a proportion of all urban residents is highest in Sub Saharan Africa and South Asia, at an astounding 70 to 75 percent. In regions where urbanization is already significantly advanced, such as Latin America and the Caribbean and Eastern Europe and Central Asia, the proportion of urban poor relative to the total poor is greatest. Research suggests that over time poverty is urbanizing, as an increasing number of the poor now live in cities. This situation has been exacerbated most recently by the global food and financial crises, which have reversed many of the advances in poverty reduction, particularly in urban areas. Urban populations are typically hardest hit due to job losses and wage reductions in urban based industries, their heavy reliance on the cash economy, and the lack of ability to fall back on agricultural production.

With more than half of World GDP coming from cities, the economic future of most developing countries will be determined by the productivity of these burgeoning urban populations. As the WDR 2009 points out, urbanization is necessary for growth but is not sufficient to assure it. The interdependency between macro-economic performance and urban welfare has been seen in the aftermath of macro-economic crises in Argentina, Brazil, East Asia, and Russia, where the poor have fallen farther than their middle class counterparts. On a global basis about 70 percent of economic production takes place in cities. Developing countries are rapidly increasing the urban shares of their GDP, with most countries already surpassing the 60 percent level. But the results in this regard are highly conditioned on whether a country proactively plans for and enables urbanization while managing the downside risks. The benefits of agglomeration have been well-documented in East Asia where cities have been a major part of rapid economic growth in countries such as China, Japan, Korea, or Malaysia. The case of China is perhaps most revealing, with 50 percent of GDP generated in coastal urban agglomerations accounting for only 20 percent of the territory. Many of the Bank‘s client countries have cities that would like to emulate China‘s experience and local economic development approaches are in high demand.

There are four key housing and land issues that consistently pose the greatest challenges in most urban areas – (i) planning for markets, (ii) public land management, (iii) property rights, and (iv) housing finance. Dealing with each set of challenges requires putting policies in place to push formal housing and land systems ―down market,‖ while at the same time creating and sustaining more ―bottom-up‖ approaches that serve the poorest. Each is addressed in more detail below.

Promoting a safe and sustainable urban environment is a key priority of the Bank’s Urban Strategy. In this section we review key challenges, consider what innovative cities are doing today, and outline approaches that the World Bank will support over the coming decade under its Urban Environment, Climate Change and Disaster Management Business Line.

The previous sections of the strategy reviewed recent urban developments against five thematic areas that define the Bank‘s business lines and intervention strategies with respect to policy advice, analytical work and investment lending. Lessons learned over the past decade based on a review of urbanization trends, key challenges and performance issues for local governments, and operational interventions within the Bank‘s urban development portfolio will help shape the new urban agenda for the decade ahead.