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Global macro & geopolitics from a small economy perspective

City-states and an urban agenda

David Skilling
Singapore Straits Times, 9 June 2012

Cities are increasingly understood to be engines of growth and innovation, and are key global nodes of economic, political and intellectual activity. It is not just countries that are the relevant actors, it is the global cities such as New York, London, Hong Kong and Singapore.

In this context, how should we think about city-states such as Singapore (and others)? Singapore’s position as a city-state distinguishes it from other global cities – such as London, New York, and Shanghai – as well as from other small states – such as Denmark, New Zealand, and Switzerland. Do city-states get the best of both worlds – being a global city, together with the advantages of nationhood – or do their national responsibilities constrain the ability of city-states to compete with other cities? And what should be on the agenda of city-states?

These are important questions not just for city-states but also for other major cities that are becoming more powerful and autonomous, such as New York and London and the large, rapidly growing cities in the emerging markets.

Many small states have performed strongly over the past few decades, responding quickly and flexibly to the challenges and opportunities of globalisation. City-states are similarly well-placed to respond to the changing global context. Relative to other cities, city-states have a full set of decision-making rights and policy levers. City-states can proceed with more autonomy in areas such as fiscal and monetary policy, immigration, and trade agreements, enabling them to position themselves in a more coherent way than cities that are part of larger political units. So this might suggest that city-states are well-placed to prosper. Singapore as a 21st century version of Venice.

But it is also possible that city-states are ‘stuck in the middle’, subject to pressures that both other cities and small states do not face. Specifically, cities, including city-states, are more sharply impacted by globalisation than are countries (even small countries). Global cities function as hubs of economic activity, and have higher levels of external flows of goods and services, capital and people (attracting both global talent and those on low incomes). And economies of cities tend to be less diversified with no agriculture or resource base, and a smaller range of economic activities often with an emphasis on services. These characteristics mean that cities are more exposed to external shocks and tend to have higher levels of income inequality than are countries, which tend to be more diversified and to be less exposed to cross-border flows. Indeed, the performance of city-states on measures such as income inequality is more similar to other cities than to other small countries. Singapore’s Gini coefficient, for example, is not very different from that in New York and Hong Kong.

These realities create pressure because of a key difference between city-states and other cities – the mobility of people. In city-states, people have no options for remaining in the country outside the city. They cannot get away from the economic and social aspects of city life, except by emigrating – and many will have limited options in this regard. In other cities, there are significant inflows and outflows of people – both within the country and internationally. The absence of this self-selection process in city-states means that the preferences of the average citizen in a city-state are likely to be quite different than those of a resident of cities like London and New York, who could more readily leave if they wanted. Governments of city-states have to accommodate a population with a more diverse set of economic and social preferences than do other cities. For this reason, benchmarking of city-states against other cities on measures such as income distribution should be approached cautiously.

The implication is that there is a greater need for city-state governments to address issues of quality of life, income distribution, and economic volatility than is the case in other cities – and to do so in ways that do not compromise the ability of the city-state to compete in the global economy. The extent to which city-states achieve this will determine whether city-states get the best or the worst of both worlds.

The record of small countries – that are exposed to many of the same global forces as city-states – suggests that it is possible to manage these issues while maintaining competitiveness. Indeed, many successful small states, particularly those with a high level of openness to the global economy, have developed deliberate strategies to address their risk exposures and the potential for unequal income distribution. These strategies range from prudent macroeconomic policy settings, well-designed, comprehensive social insurance, to thoughtful economic strategy (such as diversification across sectors), and heavy investment in education. And the more acute global exposures that city-states face – such as the effects of an external shock on a key sector – means that these issues require even tighter management.

It is possible to manage the pressures that come from being a city-state, and to secure the benefits. But it requires a deliberate approach to policy, in a way reminiscent of successful small states. And it is not obvious that responding to these additional issues will exert a meaningful constraint on the performance of city-states relative to other cities – just as many small states have done well. But if the challenges are not deliberately managed, city-states may underperform both their city peers and their small state peers.

These strategic policy issues should be at the centre of the agenda for conversations about cities. Governing cities is not just about infrastructure and urban planning, important though these topics are. There needs to be a pivot in attention towards consideration of the policy choices that will enable city-states and other global cities to prosper in a more challenging global environment. These policy issues are commonly discussed in national capitals, but also need to be part of the urban conversation as cities become increasingly important parts of the global system.