ECONOMICS OF URBANISATION,

URBAN RENEWAL AND

REDEVELOPMENT
ECONOMICS OF URBANISATION
• Introduction: What is urban land economics?
• How the cities exist?
• Definitions of urbanisation
• The nature of urbanisation
• Forms of urban growth
• Theories of urban growth
• Policies for town expansion
• Problems of new towns
• Advantages of urbanisation
• Disadvantages of urbanisation
URBAN RENEWAL & REDEVELOPMENT
• Quality of urban environment
• Urban renewal
• Redevelopment
• City centre redevelopment
• Urbanisation and Externalities
INTRODUCTION
What is urban land economics?
• Concerned with the economic implications and consequences
of the scarcity and choice of essentially urban property rights
• Conventional economic analysis cannot easily be applied to
urban situations
• The market is absent for many products
• The investment decisions are usually undertaken without
reference to the urban structure
• Property market is unique
INTRODUCTION
• Economic analysis can and must be applied to the
many problems relating to urban land use:
• The location of economy activity,
• Spacial structure and urban growth,
• Land values and town planning,
• The property market,
• The process of development,
• The technique of investment analysis,
• Betterment and land nationalisation,
• The economic of housing,
• Etc – all need economic analysis
INTRODUCTION
Economics of urbanisation:
• Relatively new field
• Concerned with:
a) understanding and explaining the economic factors and
forces underlying the process of urbanisation and urban
growth
b) examining and analysing the economic aspects of urban
problems
INTRODUCTION
Urbanisation process creates immense difficulties for
urban authorities:
• Urban concentration
• Public services
• To individuals, cities offer better services and amenities
• Firms find they can produce more cheaply in cities
 HOW THE CITIES EXIST?

• Many reasons
• With singular/multiple functions:
➢defence, trade, tourism, education, administrative, etc.
• But economic factors – reinforced the original impetus
• Initially growth associated with industralisation
➢More intensive use of existing buildings,
➢Changes in their use, and
➢Outward expansion

Basic economic factors underlying the existence and growth is

essential
HOW THE CITIES EXIST?
Cities also exist because of:
• Desire of human to interact socially
• Defend and protect themselves from marauding group of
outlaws or wild animals
• Live close proximity to one another in an effort to obtain
some measure of social security
• Seek each other’s company
HOW THE CITIES EXIST?
When did the first city appeared?
• Six millennium B.C., ???????
• Catal Huyuk on the Anatolian plateau of Turkey
• Despite this fairly long history, it has only been in the last
100 – 150 years that urbanisation has really gained
momentum
HOW THE CITIES EXIST?

This expansion of urban living raise two questions:

i. What were the origins of the city and what factors
were instrumental in initiating the trend towards
urban living?
ii. Why has the process of urbanisation accelerated so
rapidly during the past century?
HOW THE CITIES EXIST?

Why the urbanisation process began?

Traditional theory
• Initially a slow process which progressed from village life.
Permanent settlement replaced nomadic existence

Jane Jacobs (1972)

• Cities grew out of trading centres where nomadic hunters
met with local inhabitants who were willing to trade
minerals and other raw materials
AGGLOMERATION ECONOMICS

• Why industry and population should continue to

concentrate in cities?
• Why particular firms and individuals select one city in
preference to another?
• Need to examine the returns or benefits obtained from
locating in an urban area.
➢ Concentration – of different economic activities
➢ Agglomeration economics
AGGLOMERATION ECONOMICS

• These economies are composed primarily of what

economies call ‘externalities’ or ‘external exclusively’
• External economies refer to the response of one firm’s
output to the activities of others
• The impact of activities of one party to another party
• Agglomeration economics may occur when close
geographical proximity generates external benefits for the
firms and industries involved
AGGLOMERATION BENEFITS

• The potential size of the local market

• A large local market can also reduce actual production
costs
• The requirement of a threshold level of population before
certain public services are provided
• Geographical concentration
• A pool of skilled labour
• The same goes to the pools of managerial and
entrepreneurial talent
AGGLOMERATION BENEFITS

• Financial and commercial facilities tend to be superior

• Urban concentrations can usually offer a much wider range
of facilities
• Businessmen prefer to concentrate because it enables face-
to-face contact
• Greater incentive for firms to innovate when there is
geographical concentration
DEFINITIONS OF URBANISATION

‘‘The confederation or union of neighbouring clans

resorting to a centre used as a common meeting place for
worship, protection, etc., hence the political or sovereign
body formed by such a community’’
DEFINITIONS OF URBANISATION

‘‘An urban area is a composite of cells, neighbourhoods or

communities where people work together for the common
good.’’
• The types of urban areas, therefore can vary greatly as
person participate in production, the trading of goods,
transportation, delivery of a variety of services or a
combination of these activities.
DEFINITIONS OF URBANISATION

‘‘Urban areas are location where there is opportunity

for a diverse type of living environment and life styles.’’
• People work and enjoy themselves in social and
cultural relationships provided by the proximities
of an urban area
DEFINITIONS OF URBANISATION
To an urban economist:
A geographical area is considered urban if it contains a large
number of people in a relatively small area.
‘‘An urban area is defined as an area with a relatively high
population density.’’

• The economist’s definition is stated in terms of population

density
• Urban economy is based on frequent contact between
different economic activities and such contact is feasible only
in firms and households are placed into a relatively small area
DEFINITIONS OF URBANISATION

In summary:
• Urban areas can be simple or complex
• They can have rural flavour or that of an industrial
workshop
• They can be peaceful place or filled with all types of
conflicts
THE NATURE OF URBANISATION

• ‘City’ or ‘urban’ implies a concentration of people in a

geographic area who can support themselves from the
city’s economic activities
• City can be the centre of industry, exchange, education,
government or involve all these activities
• These diverse areas of opportunity attract people from
rural areas to cities.
• Cities tend to become big if their economic base is wide.
THE NATURE OF URBANISATION

• The smaller cities are usually satellites that depend on

larger cities to sustain their economic life
• Central cities have multiple functions, whereas the
suburban surrounding the cities have mainly the purpose
of housing
• Cities also have circulation systems:
➢ Unite the different areas of the city, and
➢ Provide routes for bridging commodities from farms
to the city’s distribution centres
THE NATURE OF URBANISATION

• Multiple forms of transportation and transit are often

available in the cities
• Cities also have many faults with regard to their services
to people such as overcrowded, contained large amount
of substandard housing, be centres of unemployment,
etc.
• However, with all these faults, cities are here to stay. It
is the duty of everyone to make our cities better place
to live in.
THE NATURE OF URBANISATION
FACTORS INFLUENCING THE LOCATION OF A TOWN
(MALAYSIA)
• Physical characteristics of town; suitable
location include sea side, river estuary, meeting
of road junctions or border of the countries
• Location protected by the flow of strong wind
or current
• Meeting of road junctions
• Location determine by natural
resources and minerals
• Government policy
• Weather – hill resort or town
THE NATURE OF URBANISATION
FACTORS DETERMINING THE GROWTH OF TOWN
(MALAYSIA)
• Population increase: health improvement and
increase in rate of growth of population
• Job opportunity in commercial and trading
• Migration of population from rural and sub-
urban areas
• Education, recreational and entertainment
opportunities
• Resettlement of population/new village
• Government policy – establishment of new
growth and town areas, FELDA, FELCRA
• Expansion of town boundaries
FORMS OF URBAN GROWTH
(ESPECIALLY IN DEVELOPED COUNTRIES)

1. Urban renewal
• Usually with much higher building

2. Inter-urban competition
• Resulting in the movement between cities as some
grow: Eg. KL – Putrajaya, Kuantan – Indera Mahkota,
Shah Alam – Puchong, Penang (main land) – Seberang
Prai, JB – Pasir Gudang, and KB – Pengkalan Kubur
FORMS OF URBAN GROWTH
(ESPECIALLY IN DEVELOPED COUNTRIES)

3. Movement of population
• With the rise in income and the development of fast
and convenient transport
• From the inner and older parts of the city to the
suburbs and outlying town and villages
• Sharp distinction which once existed between ‘town’
and ‘country’ tends to be diminishing
FORMS OF URBAN GROWTH
(ESPECIALLY IN DEVELOPED COUNTRIES)

4. Hierarchy of urban centres

• Has evolved, differing in size and importance
➢ District – municipal – city
➢ Kampung – mukim – daerah – negeri - persekutuan
THEORIES OF URBAN GROWTH

ECONOMIC BASE INPUT-OUTPUT KEYNESIAN

THEORY ANALYSIS MODEL

Input from
Basic Activities Industry &
Others

Output from
Non-basic
Industry &
Activities
Others
 EMPLOYMENT

Basic Non-basic
Activities Activities
 THEORIES OF URBAN GROWTH
1. ECONOMIC BASE THEORY
• Size of an urban area depends on the amount of goods and
services supplied to outsiders, ie. on ‘exports’
• Divides urban economic activity into 2 categories which are
basic activities and non-basic activities
• Employment is also similarly divided into basic and non-
basic
• Growth of basic activities – dominant cause of urban growth
• Increase demand for basic activities would increase demand
for labour
THEORIES OF URBAN GROWTH
2. INPUT-OUTPUT ANALYSIS
• Emphasises the importance of treating on urban area
as open rather than as a closed economy, by..
• Examining inter-industry and inter-area linkages
• For each industry:
i. Purchases of input (labour, material, transport, etc.) from all other industries and
sectors of the economy (both inside and outside areas)
ii. Output of industries (ditto)
THEORIES OF URBAN GROWTH

INDUSTRY

VALUE OF PURCHASES OF VALUE OF PURCHASES OF

INPUT OUTPUT
(other industries and sectors) (other industries and sectors)

INSIDE OUTSIDE INSIDE OUTSIDE

THEORIES OF URBAN GROWTH

INPUT-OUTPUT MATRIX

INPUT OUTPUT

INDUSTRY

OTHER SECTORS
THEORIES OF URBAN GROWTH

3. KEYNESIAN MODEL
• Keynesian model of the determination of the income
of the national economy can be used to explain the
growth or decline of the urban economy
• Changes in the total income of the urban area will
result in changes in the level of business activity and
employment .
THEORIES OF URBAN GROWTH
INCOME APPROACH

Income from employment 40

Income from self-employment 5

Gross trading profits of companies 5

Gross trading surplus of public utilities 5

Rent 5

Total domestic income before providing for 60

STOCK APPRECIATION -15

Gross domestic product at factor cost 45

Net property income from abroad 5

Gross national product at factor cost 50

POLICIES FOR TOWN EXPANSION
The growth of the town presents two problems:
a) Finding living space for growing population. Solved by:
i. Redeveloping the central area at higher densities and
ii. Developing suburban communities or even new urban
communities away from the city
b) Improving the existing urban environment by:
• Dealing with inner-city decay, pollution, traffic
congestion and poor housing conditions
• May be overcome by demolition of slump area,
improving transport system and refurbishment of
building
PROBLEMS FOR NEW TOWNS
The concept of new towns raises problems both size and
planning
1. What size of new town should be planned?
• Large enough to become independent
• Self-contained
• Self-supporting communities, and
• Also by taking into account such factors:
• Acceptable internal densities, and
• Proximity of homes to place of work
PROBLEMS FOR NEW TOWNS

2. Can the planned size be achieved?

• Economic base of a new town will be determined by
the amount of:
• Basic industry
• Non-basic industry

3. Why must the land use of the new town be planned in

advance?
• ‘Natural’ development
PROBLEMS FOR NEW TOWNS
The possible size of new town depends upon its regional
setting:
• Distribution of population
• Industry
• Roads
• Means of transport
• Public utilities, etc.

Only a very large new town might expect to compete

successfully as a shopping centre against the establishment
retail centres of other urban areas in the region
ADVANTAGES OF URBANISATION
1. Specialisation
2. Large scale production
3. Economies in the use of the public services
4. Complementary between activities
DIVERSIFICATION
Diversification is defined as ‘’the process by which firms
extend the range of their business operations outside those in
which they are currently engaged’’

This broad classification includes:

a) Vertical Integration
• Backward integration – products are input
• Forward integration – extension of the firm’s activities
b) Horizontal Diversification
• Other markets – not involving the firm in any vertical
relationship as in (a) above
DIVERSIFICATION
Backward Integration

(products are input to main

operation)
Horizontal
Vertical Diversification
DIVERSIFICATION
Diversification
(movement into other market)

(extension of Firm’s
activities)

Forward
Integration
DISADVANTAGES OF URBANISATION
1. Higher transportation costs
2. Traffic congestion
3. Increased pollution
4. Social problems
5. Increase cost of land and cost of living
THE QUALITY OF THE URBAN ENVIRONMENT:
PROBLEMS OF URBAN AREAS

• Complete redevelopment of town centres – necessary in

some towns (extensive growth is anticipated)
• As the city grows, decisions have to be taken on the
structural form that overspill should take
• Outward growth also creates problems within the older
built-up area – urban decay, economic decline,
pollution, traffic congestion, etc
THE QUALITY OF THE URBAN ENVIRONMENT:
PROBLEMS OF URBAN AREAS
These problems arise because:
1. Built-up area can only adjust slowly to changes in the
conditions of demand and supply
2. As the size of urban area grows, the external cost of
more concentration on the centre increases and
multiplies

Both problems are closely inter-related both as regards their

causes and their effects on the quality of the urban
environment
URBAN RENEWAL

• Overtime buildings deteriorate

• Changes in the conditions of demand and supply
necessitate a change in the use of land resources
• Price system responds
• A building will be demolished and replaced by a new
one when the present-use value is less than the value of
the cleared site
• Price system – satisfactorily (small changes in land use)
URBAN RENEWAL
Problems arise with comprehensive urban renewal, whether
that is:
• City centre redevelopment, or
• Generation of ‘twilight‘ zones and slump areas
• A number of important practical issues result from development
• Twilight areas are characterised by ‘’Multiple-occupation, overcrowding, lack of essential
facilities, neglect, dilapidation, mixed industrial and commercial uses and general
environment decay’’
REDEVELOPMENT

When does redevelopment take place?

• Expected flow of future net returns from the existing
use of the land resources becomes less than the
capital value of the cleared site
REDEVELOPMENT
Expected Gross
Annual Return +
Operating Cost (RM) OPERATING
COST

EXPECTED NET ANNUAL RETURN FOR ANY

GIVEN YEAR

GROSS
EXPECTED
ANNUAL
RETURN
(GAR)
Years O N Z

GROSS ANNUAL RETURNS AND OPERATING COSTS OVER TIME

REDEVELOPMENT

PV (capitalised
future NAR) in
existing use (RM)

The PV of building in its existing use

O Z Years

THE PV OF A LAND RESOURCE OVER TIME

REDEVELOPMENT

• NAR for the whole of the future life of the building

have to be discounted to the present and then
aggregated in order to obtain the PV of the land
resources in its current use
• PV of the building become zero after OZ years if no
redevelopment has taken place by then, the land
resources are left derelict/abandoned
REDEVELOPMENT

PV of the existing
use & value of
cleared site Value of
(RM) cleared site

Secures land and building for

existing use
Retains land & building in
existing use Z
Years O T
PV

Redevelopment

THE TIMING OF REDEVELOPMENT

CITY CENTRE REDEVELOPMENT

• Limited spaces available – effects of changes in the

conditions of demand and supply are accentuated
Example:
Any increase in demand for central offices has to be
concentrated on a relatively small area; high rise
buildings soon become economically viable and
redevelopment proceed apace/quickly
CITY CENTRE REDEVELOPMENT

• City centre redevelopment takes place in response to the

price mechanism
• Redevelopment by private enterprise had disadvantages
most of which stem from the inherent defects of the
market economy;
1. Certain redevelopment may be thwarted by a key site owner who uses his ‘monopoly’
power to extort a high price for his interest
CITY CENTRE REDEVELOPMENT

2. Renewal may be delayed while all the interests affected are brought within a single
ownership
3. External benefits of conserving aspects of the city centre may be overlooked by
developers seeking relatively short-term gains
4. Not all possible complementarities may be secured, eg. Linking new shops with such
public services
5. Private enterprise has to develop within the existing infrastructure such as the road
layout
CITY CENTRE REDEVELOPMENT

Control of city centre redevelopment:

a. Piecemeal restoration (piece by piece), adaptation
and rebuilding
b. Comprehensive redevelopment
URBANISATION & EXTERNALITIES
▪ Government controls ensure the growing size of a city would not create negative impacts to its
community and environment. These impacts are known as ‘externalities ’.
▪ Externalities are costs and benefits which are not provided for in market prices. It may be possible
for such externalities to be accounted for by private bargaining arrangements.
▪ In most cases, it is necessary for the government to intervene in order to ensure that externalities
are accounted for to ensure social optimal outcome is achieved. The planning system is one of the
ways used by goverment to ensure defects of the market are dealt with.
URBANISATION & EXTERNALITIES
Approaches to assist the government in handling the impacts of
‘externalities’:
1. Introduce pricing system
- To bring externalities into the reckoning
- Example, to deal with congestion, parking meter may be
installed with even local people charged for reserved
parking permit
2. Taxation and subsidies
- tax being implemented to handle externalities, example
left empty house, being charged by tax to solve the
homeless problem
- External benefits may be allowed for by subsidies
URBANISATION & EXTERNALITIES

3. ‘Internalised’ by parties concerned

- By combining or widening the area of control
4. Government assume responsibility of providing certain
good and services
- Commands when externalities are:
➢ National importance, eg. Drainage and water interests
➢ Extensive, only government has the capacity, eg.
providing a major highway, airport
➢ Cumulative – eg. a slump area; if left to private
enterprise, the clearance of slump would take years
URBANISATION & EXTERNALITIES

5. Physical controls
- Through implementation of law/act related
- Where all parties need to follow, or else being charged

Read Chapter 12: Urban Land Economics (Jack Harvey)