A mayor’s plan for economic growth? Building an enabling city

This blog builds on earlier work on why cities are the engine of growth in developing countries, focusing on what city leaders can do in practice. 

Imagine a newly elected mayor taking office in a city where few firms scale or expand, private investment is weak, productivity is stagnant, and youth unemployment remains high – all while under mounting pressure to deliver economic progress. Trade policy and taxation are largely determined at the national level, and municipal budgets are often tight. In that context, what can a mayor realistically do to encourage firms to invest, expand, and create jobs?

This blog draws on a recent IGC policy brief examining evidence across four areas: the productivity gains cities can generate; the role of infrastructure and service delivery; how regulation shapes firms’ ability to start and grow; and how employment support programmes can – and cannot – help.

Well-functioning cities are crucial for businesses to form and grow

Firms’ performance depends not only on their internal capabilities but also on the wider systems in which they operate. Reliable infrastructure reduces operating costs; well-connected transport systems improve access to workers, suppliers, and customers; and predictable regulation supports private investment. Together, these (and other) urban conditions shape firms’ daily operations and expansion decisions.

When urban systems function well, firms capture the benefits of density, as discussed in this Cities that Work video and accompanying blog on why cities matter for growth. However, when those systems are unreliable or fragmented, the same concentration of people and activity can raise costs and uncertainty, acting as an indirect tax on business. Urban policy, therefore, sits alongside other growth levers as part of a wider economic strategy.

Public infrastructure and services create the foundations for businesses to thrive

Productive density requires reliable infrastructure. Electricity, water, sanitation, transport, and digital connectivity shape firms’ operating environment and workers’ ability to participate in the labour market. When these systems fail, firms adapt in ways that raise costs or push activity into the informal sector.

Across many African cities, erratic power supply forces firms to invest in backup generators, increasing costs and limiting expansion. Power outages in Sub-Saharan Africa have been shown to reduce firm output by up to 10%. Poor water and sanitation can increase absenteeism and undermine worker health, particularly among lower-income households. Congested roads also constrain growth by reducing the effective reach of labour markets and increasing commuting time and costs.

City governments can influence these constraints through targeted investment. In Lagos, a bus rapid transit system cut commuting times by around 40% and reduced fares substantially, directly expanding the pool of workers firms can access. In Kampala, solar street lighting extended trading hours and supported a more vibrant night-time economy. These examples show how focused interventions can ease bottlenecks without sweeping overhauls.

Equally important is how existing systems are managed. Reducing losses in electricity and water networks, improving maintenance, and strengthening service delivery can significantly improve reliability – often at lower cost than building new infrastructure. For mayors facing tight fiscal constraints, this distinction matters.

Land markets and housing are part of the same picture. Poorly functioning urban land markets act as a hidden tax on growth. Insecure land rights increase the uncertainty and cost of investment decisions, while limited land supply pushes housing and commercial rents above what incomes can support. In these circumstances, firms pay more for workspace, and workers spend a larger share of their earnings on rent or endure long, costly commutes. As a result, the gains from density are partly dissipated before reaching firms or households.

Reducing red tape and stimulating investment to improve the urban business climate

A city’s competitiveness depends not only on infrastructure but also on the regulatory environment in which firms operate. Cumbersome licensing procedures, opaque fees, and fragmented administrative processes impose real costs – particularly on smaller and newer firms that lack the networks or resources to navigate them. In some contexts, registering a business can consume more than half of an entrepreneur’s annual income. Faced with such barriers, many firms remain informal, delay expansion, or never enter the market.

Streamlining procedures can ease these frictions and support firm entry and job creation. When Mexican municipalities introduced one-stop business registration centres that reduced the time and cost required to formalise, both new firm formation and wage employment increased. The Kigali Special Economic Zone provides another example of how regulatory clarity can shape firm performance – by simplifying procedures and reducing uncertainty around approvals and compliance, the zone created a more predictable operating environment. Firms in this space increased output by roughly 50% more than comparable firms outside the zone, alongside significant employment gains.

Cities can also influence investment through stronger coordination across departments. Transport improvements, for example, often increase demand for housing and commercial space. If planning regulations are slow to adjust or supply remains constrained, rents can rise, eroding potential gains. Aligning transport, planning, and land use decisions can therefore influence the overall cost of operating in a city.

Improving employability requires stronger human capital and fewer barriers to finding work

Even in well-functioning cities, growth does not benefit everyone equally. Young people, women, and other marginalised groups often face overlapping barriers to finding and keeping decent work – including limited skills, poor information about vacancies, high search costs, and other mobility constraints.

Active labour market programmes can address some of these barriers, but design is critical. Training programmes show the most durable impacts when they are closely linked to private-sector demand and include hands-on workplace experience. For instance, Colombia's Jóvenes en Acción programme, which combined vocational training with internships for disadvantaged urban youth, produced sustained gains in employment and earnings.

Yet many programmes show modest or short-lived impacts relative to their costs, making rigorous evaluation essential before scaling. Public works programmes illustrate the risks of poor design. Ethiopia's Urban Productive Safety Net Programme did bring some previously unemployed workers into paid work. But because wages were set well above private-sector levels, many participants who already had jobs reduced their private employment by roughly twice the hours they gained in public work. Total hours worked across the city, therefore, remained almost unchanged.

Employment programmes are most effective when they complement, rather than substitute for, improvements in the urban business environment. Connecting people to jobs matters, but sustained employment growth ultimately depends on productive firms operating in functional cities.

Cities as part of the growth equation

Improving urban conditions for business does not require a sweeping new agenda. Many of the elements that shape firm performance – reliable infrastructure and services, streamlined regulation, and well-designed employment support – are part of city governments' everyday work. The challenge is often not to introduce entirely new policies, but to deliver these core functions better, faster, at lower cost, and in ways that fit local contexts.

Cities that Work has developed a set of policy toolkits to help governments navigate the multiple trade-offs involved in designing and implementing a variety of urban policies:

• Urban land use: This collection covers two key policy challenges preventing efficient land use in cities – unclear and poorly administered land ownership, and unrealistic and reactive urban planning.
• Housing, infrastructure, and public services: This collection examines policy options for informal settlements, and improving transport, water and waste management services.
• Municipal finance and urban governance: This collection focuses on raising revenue through land and property taxes, building authorising environments, and using data for decision-making in cities.

• Firms and employment in cities: This publication explores how getting core urban policy right can create an environment for businesses to thrive and workers to access better employment opportunities.