The acceleration of urbanisation has strengthened the weight of large cities, or metropolitan regions. More than half (53%) of the total OECD population lives in predominantly urban regions and the OECD contains 78 metro-regions, with 1.5 million and more inhabitants, which tend to concentrate an important part of their national economic activities. For instance, Budapest, Seoul, Copenhagen, Dublin, Helsinki, Randstad-Holland and Brussels concentrate nearly half of their countries’ national GDP. Toronto, Montreal and Vancouver in Canada generate half or more of their respective provinces’ output. In Norway, New Zealand, and the Czech Republic, one-third or more of production is based in their major metro-regions (Oslo, Auckland and Prague). Around 30% of national GDP in the United Kingdom, Sweden, Japan and France are accounted for by London (31.6%) Stockholm (31.5%), Tokyo (30.4%) and Paris (27.9%) respectively. More importantly, most OECD metro-regions have a higher GDP per capita than their national average (66 out of 78 metro-regions), and a higher labour productivity level (65 out of 78 metro-regions), and many of them tend to have faster growth rates than their countries.

Globalisation and the acceleration of international trade flows have put cities back on the stage. Today, large cities, or metropolitan regions (metroregions), are the key loci of transnational flows and function as essential spatial nodes of the global economy to such extent that one hears talk of “a common market of metropolitan economies”. Yet, the role of large cities in economic growth and their capacity to concentrate large parts of population and economic activity across national territories are not a new phenomenon. Memphis, Alexandria, Athens and Rome were the eyes of civilisation, education and power for thousands of years. The 19th century industrial revolution also asserted the role of large cities, especially trading ports. However, the acceleration of urbanisation along with globalisation and the international division of labour has reshaped the size of the metropolitan areas and their evolving nature:

Metro-regions are undoubtedly important actors of national economies, although they are not always synonymous with wealth. Overall, city size is positively associated with income. Capital cities, with their distinctive range of occupations and sectors, are at the fore. Thanks to their capacity to attract labour and firms from elsewhere within and across countries, metro-regions have a higher GDP per capita than their national average (66 out of 78 metroregions). And most metro-regions also have higher labour productivity levels than their country average (65 out of 78 metro-regions). Metro-regions tend to have a more favourable demographic structure than their national averages as well, with lower dependency ratios. Not surprisingly, these regions tend to have faster growth rates than their countries. Yet, overall performance of metro-regions does have some limits. First, there are important exceptions to the group of above national average well performing metro-regions, some ostensibly “dysfunctional”. Moreover, differences of output, productivity and employment from national averages are not so large. And after a certain threshold (around 7 million) the city size and income association becomes negative, probably due to congestion costs and other diseconomies of agglomeration. Finally, the generally strong economic performance of metroregions frequently comes at a cost: unemployment, inequalities, and various indicators of a lack of social cohesion (such as crime rates) tend to be higher.

Metropolitan governance emerges as a key issue for managing urban growth and for the implementation of policy actions and strategies in pursuing competitiveness objectives. Cities have to cope with negative effects of urbanisation and international division of labour (urban sprawl and spatial disparities, congestion and pollution, social issues and distressed areas) but they also have to produce proactive actions to improve and sustain their competitiveness position. Although market forces have contributed to shape the development of metropolitan areas, public policies addressing physical infrastructure (transport and communication, education and research centres) as well as soft measures (the animation of clusters, universities and firms linkages, human capital, etc.) are also increasingly important for large cities to attract and retain a potentially mobile workforce and capital. Yet, in a context of increasing strain on fiscal/financial capacities, cities (and other governmental layers) have to constantly “perform better with less”. Providing more efficient and effective public services, making economies of scale, and dealing with infra-metropolitan equity issues (positive or negative territorial spillovers and externalities) are a particular challenge for metropolitan regions.

The following chapters derive from papers presented at a series of conferences and workshops on city competitiveness organised by the OECD Public Governance and Territorial Development Directorate.

The origins of urban development and growth in modern society reside above all in the dynamics of economic production and work. These dynamics underlie the shifting fortunes of each individual urban area, just as they account in significant degree for the wider systems or networks of cities found in contemporary capitalism. Actual cities are always considerably more than bare accumulations of capital and labour, for they are also arenas in which many other kinds of phenomena – social, cultural, and political – flourish. We might say, to be more accurate, that localised production complexes and their associated labour markets constitute proto-urban forms around which these other phenomena crystallise in various concrete structures. As this crystallisation occurs, moreover, a process of reflexive interaction is established in which all the different dimensions of urban life continually shape and reshape one another. Still, in the absence of the basic genetic and functional role of production and work, cities as we know them would be immensely different in scale, extent, and substantive expression, perhaps nothing much more than simple service centres or small communities of likeminded souls. As it is, the complexities of the modern city are compounded by the fact that the dense many-sided human interactions that make them up are the source of endless, but always historically and geographically specific, forms of creativity and socio-economic change (Hall, 1998).

How different types of urban regions contribute to national growth is an important policy question. For advanced economies, Henderson's (1997) analysis suggests that the contribution of different types of cities (medium sized and large) to national economic development does not change significantly over time, as the size distribution remains constant, and also, urban specialisations are relatively persistent. The data used for the analysis are from before 1990. The question is whether this pattern still holds for the 1990s and beyond.

Medium-sized cities in search of new sources of dynamism face a difficult agenda. The dynamic high-tech developments with which every place would like to be associated are difficult to grow. By definition, innovative, entrepreneurial ventures are risky and might fail. They are also unlikely to create, by themselves, high levels of employment. Quicker, less exacting routes to providing large numbers of jobs are more likely to be found at the other end of the scale of knowledge intensity. But these will not bring much autonomous development, and some, though by no means all, are vulnerable to global competition. Crucial to local dynamism are local collective competition goods, which, as explained below, can provide the focus of a citylevel policy agenda. However, the fact that many advanced sectors of the new economy tend to favour capital and other large cities raises doubts over the continuing capacity of individual medium-sized ones to “go it alone”.

Cities with the highest innovation levels and more skilled workforces are attractive to the private sector as being the best places in which to locate (ODPM, 2004). The scope for tertiary education to help cities compete in the global economy is illustrated by the taxonomy in Table B.1. This classification of activities falls into five main categories: innovation; developing an entrepreneurial culture and supportive environment; human capital; direct economic multiplier effects; and governance – that is, participation in citywide decision-making across a wide range of economic development issues.

A major change in urban governance, particularly by old industrial cities that have experienced an unprecedented magnitude of industrial decline, has been the adoption of attempts to achieve economic regeneration by promoting cities as attractive locations for new businesses and workers that belong to the knowledge economy. This paradigm shift in urban policy has posed a formidable challenge for planners, because traditional policies, particularly redistributional measures, have either become obsolete or ineffective under current circumstances where many cities are fiercely competing for internationally mobile capital and talent. It has become clear that urban economic regeneration demands a pro-active and pro-growth approach which encourages wealth creation in the private sector. Such an approach necessitates, first, innovative mobilisation of diverse policy tools and resources, such as: flagship property developments in city centres with spectacular architectural designs; establishing new cultural facilities, hosting major cultural and sport events, festivals and fairs; promoting public art, preserving and restoring heritage; and city branding. Second, close partnership with the private sector to reflect its needs and interests in policy planning is increasingly becoming a key feature in the institutional framework for regeneration. Partnership and entrepreneurialism are the guiding principles in these coalitions. This market-led approach has also changed the role that governments (central and local) perform – as enabler and facilitator, rather than regulator and provider.

The purpose of this paper is to explore the relationship between social and economic conditions in cities. The emphasis is on the influence of the social environment on economic performance, rather than in the other direction. This is partly because the impact of economic change and material conditions on social well-being and human relationships is better understood and more widely accepted. This cannot be said for the effect of social circumstances on economic outcomes.

During the 1970s and 1980s we had become accustomed to the idea that, despite the race to urbanisation across the developing and industrialising world, in mature societies modern communications were making major cities obsolete as a form of development. Worse still, they were a drain on the rest of the society, since their chronic economic decline produced deepening concentrations of social problems in their cores, which required major commitments of public expenditure to avert open conflict. In particular action seemed necessary to reverse the continuing flow of business capital out of cities which pure market judgements warranted. Some of the real issues highlighted in this pessimistic view clearly remain. But, during the last decade and a half, general attitudes to cities, and the policy issues which they raise for OECD countries, have developed in ways that reflect three major steps forward in our understanding of their roles.

The subject of deprived areas has aroused new interest during the last decade with the accentuation of the phenomena of social and spatial fragmentation in cities and metropoles. These systems of urban polarisation, with the expansion of “living together” in communities and ghettos, including the ghettos of the wealthy and “gated communities”, together with the phenomenon of urban sprawl, have shown clearly that we are in a new period of metropolitan organisation. The transformation of these metropoles is far from over and has not yet enabled the concepts required to describe it accurately and robustly to be created. Thus the contradictions hitherto used between, for instance, the centre and the periphery, the city and the countryside, the urban and the rural, the internal and the external, have become less and less clear-cut. Well-established paradigms are being outflanked on all sides, while new ones are finding it difficult to make their intellectual ends meet.

Traditional economic theory and business practice have tended to pose a contradiction or trade-off between efficiency and equity: what is good for one may be bad for another. Yet recent years have seen the emergence of a group of business and other actors, particularly at the regional scale, that have begun to highlight the important of paying attention to fairness, inclusion, and sustainability in their economic strategies and planning. Why this new attention to equity, and why is it emerging at the regional scale?

The world’s major cities have evolved systems of governance that vary significantly from one to another. In some cases, for example Paris and New York, historic boundaries and government models play an important role in determining contemporary systems. In other cities, notably Toronto, London and Berlin, significant changes have recently been made to governance arrangements. Major cities often have administrative and political arrangements that differ significantly from those used elsewhere in their respective countries. Urban agglomerations in developing countries are often struggling with boundaries that are significantly exceeded by the geographical spread of their physical development. Some cities' governance arrangements are further complicated by their national and/or regional capital status.

The goal of this paper is to discuss the links between the fiscal health of cities and their suburbs and the economic health of the metropolitan areas. Metropolitan areas are widely recognised to be important engines of growth in modern economies. Our premise is that for metropolitan areas to be economically healthy, they must have a local public sector which can provide at reasonable costs needed services for households and business firms. We consider two separate questions. First, how do the fiscal institutions in a city and in a region – taxing authority, spending or service mandates, interjurisdictional and metropolitan arrangements for sharing of costs and tax base, and intergovernmental grants-in-aid – contribute to fiscal health? What is the effect on fiscal health of fiscal decentralisation and fiscal competition? Are there public policies that governments at the national, regional, and local level can follow that will reduce the fiscal problems faced by many cities? Second, what is the relation between the fiscal health of big cities and the economic prosperity and success of the greater metropolitan region? What lessons for metropolitan finance can be learned from the metropolitan areas and central cities that are doing well?