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Lost Trust
The Real Cause of the
Financial Meltdown

F

BRUCE YANDLE

T
he financial collapse of 2007–2009 is recognized as having caused one of the

most serious U.S. recessions since the end of World War II. To put this

economic disruption into perspective, however, it is not enough simply to

plumb the depths of lost wealth in real estate or equity investments or the near or

actual collapse of banks, insurance companies, auto companies, and city govern-

ments. Diffused by the high connectivity of a global economy, this disruption must

also be considered by the speed with which the knowledge economy repriced assets

worldwide, by the rapid pace of bankruptcies that followed, and by the degree to

which governments and central banks opened the stops and started pumping money

into wounded firms and institutions in an effort to reboot the world economy.

Moreover, we should consider the extent to which private firms became quasi–

publicly owned as once-celebrated free-market captains of industry and finance lined

up for government bailouts. In addition to the obvious banks, insurance companies,

brokerages, and financial institutions, the queue for bailout includes cities, counties,

states, and even real estate developers and homebuilders.1

If one could display credible charts comparing U.S. economic disruptions from

the nineteenth century forward, the 2007–2009 collapse would not be likely to take

the blue ribbon when measured in conventional terms, such as unemployment,

Bruce Yandle is professor of economics emeritus at Clemson University and distinguished adjunct profes-
sor of economics at the Mercatus Center at George Mason University.

1. On the latter two, see Timiraos 2008 and Wei and Hilsenrath 2008.

The Independent Review, v. 14, n. 3, Winter 2010, ISSN 1086–1653, Copyright © 2010, pp.

341

–361.

341

business failures, and mortgage defaults.2 But one trait might distinguish it from the

rest. In this disruption, major elements of global credit markets were disrupted. For

some major firms, credit markets stopped functioning. For example, French automo-

tive giant Renault reported that money markets were frozen following the collapse of

Lehman Brothers (Abboud and Gauthier-Villard 2009). The firm could not get

access to the credit needed to function normally. Like many others, Renault had to

slash operations to conserve cash. Municipalities, universities, and other borrowers

accustomed to gaining access to cash through the municipal auction-rate market

found the market completely closed. No transactions took place for weeks at a time.

The credit market pause of mid-September 2008 was not the result of bank runs

triggered by central-bank credit cutbacks, where depositors and investors sought to

get their money, as in 1933; nor did it evince a lack of liquidity, as in the panics of

1873, 1884, 1890, 1893, and 1907 (McDill and Sheehan 2006). The problem this

time was lost trust. Indeed, the 2008 disruption is probably the only one that re-

sulted from a sudden breakdown of assurance mechanisms—the generators of trust—

rather than from action taken or not taken by misguided central bankers. Thorold

Barker (2009) offers a timely comment along these lines, focusing on Wall Street

executives’ opportunistic behavior: “But beyond the power struggles, huge losses

and increased regulation, there is a more fundamental threat to the industry: the

destruction of trust.”3

On September 17, 2008, following (1) the government takeover of AIG, the

world’s largest insurance company, (2) a government-arranged merger between a

financially wounded Merrill Lynch and an assisted Bank of America, (3) government

refusal to save Lehman Brothers, and (4) panic-inducing statements by top federal

officials, individual agents worldwide lost trust in other economic agents and institu-

tions (“The Doctor’s Bill” 2008, 82). On September 18, banks began hoarding cash,

corporations could no longer issue commercial paper except for much shorter terms

and at much higher rates of interest, municipal-bond auction markets ceased to

function, and London interbank lending collapsed. With heavy scrutiny focused on

mortgage-backed and related assets, banks worldwide, by the International Monetary

Fund’s reckoning, saw the prospect of losing $10.0 trillion in write-offs (“When

2. There are few ways to draw empirically based comparisons across time owing to the lack of comparable
unemployment and other data. David Wheelock makes a comparison between the current housing-market
collapse and related events that are simiilar to housing-related events in the Great Depression, noting that
in January 1933 approximately one-half of all U.S. mortgages were in default, with new defaults being
added at the rate of one thousand per day. Meanwhile, personal income fell 41 percent from the 1929 level
(2008, 3). At this January 2009 writing, we are far from such depths.

3. For a scholarly treatment of the systematic inverse relationship between trust and regulation, see
Aghion et al. 2009. Stan Liebowitz (2008) explains the mortgage-default crisis, an important part of the
origins of the credit-market collapse, by focusing on the decline of mortgage-lending standards with
government encouragement and the rise of adjustable rate mortgages, which of course relates to lower
lending standards. Discussion of these mortgages in the press indicates that these loans often had subprime
characteristics, which is to say that little or no attention was paid to the borrowers’ creditworthiness and
the implications of what would happen when the mortgages adjusted (“High Dive into the Toxic Pool”
2009; Simon 2009).

342 F BRUCE YANDLE

THE INDEPENDENT REVIEW

Fortune Frowned” 2008, 4). More than $1.3 trillion in U.S.-originated mortgage-

backed securities suddenly had uncertain value (“When Fortune Frowned” 2008, 4).

Included in the mess were approximately 2,500 mortgage-based securities backed by

subprime mortgages (Steidtmann 2008).

Along with write-downs and other financial losses, critical assurance mecha-

nisms for the purpose of engendering trust across economic agents collapsed. Major

institution failure prevailed. Trust, a most fragile human sentiment, had taken a walk.

In times of financial distress, central banks can provide liquidity and lay the

groundwork for creating money. Governments can increase spending, reduce taxes,

and purchase sick assets. Presidents can exhort, and captains of industry can capitu-

late. These costly actions can matter, and may indeed generate an economic response.

But none of these actions, alone or together, can rekindle trust once the flame has

flickered out.4

What caused assurance mechanisms to fail? What triggered lost trust? And how

does the trigger point fit into the larger explanation of the credit collapse?

In this article, I describe the anatomy of the credit collapse and identify a series

of necessary but not sufficient conditions for collapse to occur. As a result of politi-

cally expanded markets and other policies, three assurance mechanisms designed to

buttress trust—independently determined credit ratings, international accounting

standards, and credit-default swaps—became trust solvents that seriously under-

mined the basis for believing in the creditworthiness of individual agents and their

institutions. As the solvents did their work, assurances were dissolved, trust evapo-

rated, and financial markets ceased to function effectively. I begin with a discussion of

how trust evolves in the formation of markets. Then I describe the institutional

skeleton that accommodated the globally expanding U.S. subprime mortgage prob-

lem. Finally, I focus on the enabling agents of trust that connected global investors

and creditors, whose demise ends the story.

Trust and Market Morality

Practically all market transactions depend on some degree of trust. Consider some

simple actions. I fill the tank of my car with fluid from a pump at a 7-11 store I have

never visited, trusting that the fluid passing through the hose is gasoline. I walk into

a large TESCO superstore in Prague, a store and company I have never patronized,

and buy a supply of groceries, including fresh fruit, soups, and coffee. I consume the

items without a second’s concern about their safety. I e-mail my broker and tell him

I want to buy a thousand shares of stock. He writes back and tells me that I must talk

with him because for securities are based on voice transactions. My broker trusts

my voice, but not my e-mail. Written contracts do not work effectively in this setting.

4. Robert J. Shiller (2009) discusses lost trust and what it will take to rekindle the flame in terms of
massive government action. His very helpful analysis seems to focus more on the U.S. economy.

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My broker is employed by a firm with a wonderful name and brand—at least such

seems to be the case because, quite honestly, I have never checked the firm’s financial

strength. Indeed, the whole idea of a firm and financial strength is an abstraction.

Trust is somehow rooted in individuals. Within all these examples, truth telling and

promise keeping are typical features of ordinary commercial life. The marketplace is

infused with trust. How did this condition come into being?

F. A. Hayek (1991) tells a compelling story about rational thought, the extend-

ed order, and market morality. In his story, market morality—truth telling and

promise keeping and other behavioral norms or rules—evolved over the millennia

through market interaction. Hayek sees trust-forming rules as resting between in-

stinct and reason in the spectrum of bases for human action. In his story, trust plays a

vital role in small-group settings, where informal rules and traditions form a basis for

trust. Trust generated by other devices then delimits the reach of an extended order

that enables resource-conserving transactions and specialization to extend across

space and time. Simply put, in the absence of market-generated, trust-forming

devices, transacting parties cannot afford enough police and regulators to induce

honest behavior among ordinary people. Trust and trust-assuring mechanisms can

be low-cost substitutes for police, regulators, and court actions.

The formation of the law merchant in the early Middle Ages, a private law

process that extends to modern times, is a case in point. The law merchant, a body

of evolving judge-made law that formed in merchant-organized courts, was devel-

oped by adventurer merchants who traveled extensively from their home countries.

“[G]eographic distances often prevented direct communication, let alone the build-

ing of strong personal bonds that would facilitate trust. . . . Internationally recog-

nized commercial law arose as a substitute for personal trust” (Hamowy 2008, 286).

The law merchant was a private, market-driven phenomenon that did not emerge

from or depend on government action.5

James Buchanan develops another explanation of ethical behavior in a small-

numbers setting (1994, 66–71). He describes a social process in which interacting

individuals signal a willingness to assist each other, to share resources in the absence

of having formal or informal contracts. The process he describes fits into Hayek’s

story about trust and its evolution. Sam Fleischacker (2004) offers a somewhat

similar interpretation of Adam Smith’s oft-quoted statement about the baker, the

brewer, and the butcher in their connection with providing the evening meal. He

suggests that more attention be paid to the sentences just preceding the more famous

ones: “[M]an has almost constant occasion for the help of his brethren, and it is in

vain for him to expect it from their benevolence only. He will be more likely to prevail

if he can interest their self-love in his favour, and shew them that it is for their own

advantage to do for him what he requires of them” (Smith ([1776] 1904, 14)

5. For more on this topic, see Ridley 1996, 202–4. Leon Trakman describes the demise of the medieval
form of law merchant and that law’s merger into common and code law (1983, 24–27).

344 F BRUCE YANDLE

THE INDEPENDENT REVIEW

Fleischacker emphasizes the importance of being able to “interest” and “shew” one’s

“brethren”—perhaps an example of Buchanan’s signaling.

Frank Fukuyama also emphasizes trust as the mechanism or social norm that

enables economic growth to occur beyond the bounds of small groups. Holding

trust constant, his analysis suggests that an expanding knowledge economy can

eliminate the need for large organizations and hierarchical firms because, in his view,

hierarchies exist for quality-assurance purposes (1995, 24–25). He indicates that

firms and other organizations become larger through vertical integration in part

because of the cost of assessing trustworthiness when dealing beyond the firm’s walls.

Following this logic, we might forecast that the current financial collapse will be a

force leading to trust-forming mergers and consolidations, aside from those that

might occur because of financial ratios and reserve requirements.

Daniel B. Klein (2002) considers the matter of trust in commercial settings

where consumers seek assurances that the transaction outcome they desire will actu-

ally be delivered. He focuses on assurance, describing the demand for assurances, the

willingness to pay for benefits received, and suppliers who provide assurances. Using

auto repair as an example, Klein explains how multiple assurance mechanisms are

supplied so that trust emerges in the consumer’s mind. With trust comes confidence

in using the services of a particular repair company. The assurance mechanisms may

include seals of approval, extended third-party warranties, the reputational capital of

the service firm or owner, and recommendations from other customers of repair

services that can be assessed directly only through experience (Nelson 1970).

Brink Lindsey also argues that “formal institutions are not enough.” These

institutions must also be buttressed by “invisible bonds of reciprocity that restrain

members of society from taking advantage of each other to the maximum extent the

law allows.” He identifies “hard” institutions, such as police and courts, and “soft”

institutions of cultural values that “allow agreements to be enforced between total

strangers across the span of years and continents” (2002). As the extended order

reaches the limits of social space, cutting across diverse cultures and norms, trust

reliance itself becomes costly. Brands, insurance, hostages, credentials, certification,

and common and code law rules become increasingly valuable.

Certified financial statements that use globally recognized and understood ac-

counting standards form one of the key assurance-building blocks for trust formation

in financial markets. When the standards evolve from market transactions, they may

be viewed as part of the assurance mechanisms that form Hayek’s market morality.

When standards are distorted politically or on the basis of regulatory expediency, they

lose their market-generated moral bearings because they no longer reflect market-

based knowledge. Credit ratings form another part of trust technology. The compet-

itive determination of ratings by such firms as Standard & Poor’s, Moody’s, and

Fitch helps agents to make trust-forming evaluations across the otherwise more

opaque records of market participants. When ratings no longer reflect competitive

market forces, their moral worth diminishes and trust erodes. Certified statements

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and credit ratings can be buttressed with specialized insurance that spreads risk and

reduces the cost of investing in risky bonds and other securities. Insurance such as

credit-default swaps, which became a significant component of global financial mar-

kets in the period from 2001 to 2008, facilitated the purchase of homes nationwide.

Along with audited statements and credit ratings, they formed part of a complex

bundle of market-generated, assurance-forming devices that energized the expansion

of the extended order.

Market-formed assurance mechanisms constitute part of the institutional frame-

work in which financial transactions occur. When these institutions are formed by a

competitive process, they support a market morality that generates confidence and

trust. Institutional failure may arise, however, when political and regulatory distor-

tions affect the operation of these trust-forming institutions.

How a Regional Subprime Mortgage Problem

Became a Financial Nightmare

According to economist Lawrence H. White (2008), the 2008 financial collapse

originated with a political effort to expand mortgage lending to consumers who

could not meet normal standards of creditworthiness. What was later to be called

“the subprime problem” began as an “affordable home” program that shoved aside

market-based constraints. As White documents, the impetus came with congressional

strengthening of the Community Reinvestment Act, the Federal Housing Adminis-

tration’s loosening of down-payment standards, and pressure exerted on mortgage

lenders by the Department of Housing and Urban Development to lend to the

unqualified. As might be expected, the most politically responsive mortgage lenders

were the two government-sponsored enterprises, Freddie Mac and Fannie Mae,

which had been organized politically to expand U.S. homeownership opportunities.

White explains how federal efforts to make home ownership more affordable

began seriously in 1934, when the Federal Housing Administration was formed for

the purpose of insuring mortgages made by private lenders to qualified borrowers.

This action taken in the depths of the Great Depression was intended to shore up

housing markets while other federal action was under way to acquire defaulted

mortgages and properties affected by the general hard times. But one might go back

even farther, to the Homestead Act of 1862, to find politicians seeking to help

Americans achieve the Jeffersonian dream of land and home ownership. Although

approximately two million homesteaders took advantage of this opportunity to settle

in the new West, about 60 percent of them failed—or, in a more modern sense,

defaulted on their mortgages (Warren 2008).

The more recent political urge to expand homeownership beyond the limits

of real capability received a major stimulus from President Bill Clinton, when he

pushed an “affirmative action” program for housing and set quotas for Fannie Mae

346 F BRUCE YANDLE

THE INDEPENDENT REVIEW

and Freddie Mac to buy poor-quality mortgages made to low-income families

(“The Subprime Lending Bias” 2008). By 2000, these mortgages, many of which

were subprime, made up half of the two government-sponsored enterprises’ loan

portfolios.

George W. Bush followed in Clinton’s footsteps in December 2003, when he

signed a new law with the wonderful name “the American Dream Downpayment

Act” (“White House Philosophy Stoked Mortgage Bonfire” 2008). The accompany-

ing U.S. Department of Housing and Urban Development (HUD) press release

described the logic of the law this way: “There is a reason why many American

families can’t buy their first home—they can’t afford the downpayment and other

upfront closing costs required to qualify for a mortgage. For as many as 40,000 low-

income families, that will change as President Bush today signed The American

Dream Downpayment Act into law” (U.S. HUD 2003).

Congress backed the law by authorizing $200 million to bring assistance to

5.5 million families by the end of the decade. This goal brought the aforementioned

HUD pressure on Fannie Mae and Freddie Mac to open the money valves. The effect

of the larger flow of credit can be seen in terms of subprime lending. From 1993 to

2003, new subprime loans accounted for 10 percent of all mortgages (Hall and

Woodward 2008). In 2004, subprime’s share rose to 26 percent; in 2005, to 28 per-

cent; and in 2006, to 40 percent. From 2005 to 2007, Fannie Mae and Freddie Mac

purchased approximately $1 trillion in subprime and low-quality (Alt-A) mortgages,

which amounted to 40 percent of the total mortgages purchased in those years

(Wallin 2008, 5). Washington Post writer Caroline Leonnig would later explain the

situation that followed:

In 2004, as regulators warned that subprime lenders were saddling bor-

rowers with mortgages they could not afford, the U.S. Department of

Housing and Urban Development helped fuel more of that risky lending.

Eager to put more low-income and minority families into their own

homes, the agency required that two government-chartered mortgage

finance firms purchase far more “affordable” loans made to these bor-

rowers. HUD stuck with an outdated policy that allowed Freddie Mac

and Fannie Mae to count billions of dollars they invested in subprime loans

as a public good that would foster affordable housing. (2008)

Pressure on the two government enterprises to enrich an aftermarket for sub-

prime mortgages, an action that would ultimately force them into bankruptcy, was a

necessary element in the story, but not sufficient. Pressure alone could not bring cash

to the store. The political dream had to be accommodated with expanded credit and,

as White (2008) shows, the Federal Reserve Board chose to provide that credit.

Evidence of the Fed’s accommodative stance is shown in figure 1, which dis-

plays data on the auction rates for six-month U.S. Treasury bills and the six-month

LOST TRUST F 347

VOLUME 14, NUMBER 3, WINTER 2010

London Interbank Offer Rate (LIBOR) for 1995 through March 2009. The six-

month LIBOR is used widely in adjustable-rate mortgage (ARM) contracts. As the

figure shows, both the T-bill rate and the six-month LIBOR fell sharply from June

2000 to September 2003 and remained relatively low through 2005. The attractive

rates were applied to ARMs that, as White puts it, “shifted the risk of refinancing at

higher rates from the lender to the borrower” (2008, 4). Many borrowers accepted a

bet that the Fed would keep rates low for a much longer time. As the more recent

data in the figure indicate, those who made that bet early in the game were wrong.

Just as surely as the Fed eased in an effort to foster a faster-growth economy, it later

hit the monetary brakes to slow the great American bread machine before it over-

heated. Therefore, the rate applied in the ARMs adjusted upward, and what had

looked like affordable housing to people who borrowed when rates were low began

to look more like the subprime problem when the same people found their mortgage

payments no longer fit the family budget.

Rising interest rates associated with Fed tightening generated severe default

effects across the United States in three regions: the industrial north-central states,

where the older auto industry (long in decline) was centered; the far west, with

California, Arizona, and Nevada bearing the brunt; and Florida, where rapid con-

struction of condominiums and houses now created a large inventory of unsold

homes. Figure 2 shows the frequency of defaults across the United States in the first

quarter of 2008. As noted, the default problem was most severe with subprime ARMs.

Thus, an accommodating Fed, which put money on the table only to take it

away later, was a necessary part of the financial collapse. But putting money on the

Figure 1
Six-Month T-Bill and LIBOR Rates, 1995–2009

348 F BRUCE YANDLE

THE INDEPENDENT REVIEW

table was not sufficient to generate a global financial collapse. For the U.S. subprime

problem to reach the limits of the global economy required something else, which

was trust.

Transmitting Trust in Mortgage Markets

To identify the institutional failure that destroyed trust, we must first describe

the assurance transmission itself. We begin with a highly stylized description of the

market that had evolved in the early twentieth century. In a rudimentary way, the

mortgage market begins when an individual seeks to borrow for the purpose of

acquiring real property—a home or commercial real estate. Lending institutions

represent savers and investors who put their money at risk in the hope of earning a

return. Lending intermediaries, such as local savings and loan associations and banks,

consider mortgage applications and make decisions based on the borrower’s credit-

worthiness and the likelihood of maintaining a pool of savings to fund the debt.

Through time, savers and investors identify dependable intermediaries; these institu-

tions are the ones that can maintain a more stable supply of lendable funds. Inter-

mediaries maintain their ability to be a dependable supplier—one that can be

trusted—by enforcing standards of creditworthiness on borrowers. This rudimentary

system has a tolerance for error that is determined by the competitive marketplace.

In a close-knit community with common ethical norms, trust identification comes

easier than where borrowers and investors are far removed from one another. In the

more distant cases—the extended order—market-generated assurance mechanisms

become critical.

Figure 2
Frequency of Defaults across the United States, First Quarter 2008

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In the twenty-first century, mortgage markets reached the limits of the extend-

ed order. The borrowers and lenders described earlier were still an integral part of a

closed system, which is to say that the system relied on resources contained in it and

generated by it. There was no exogenous source of bailout money, but additional

components that globally expanded the availability of lendable funds had been added

to system. The direct lender, who previously made a mortgage and kept it on the

books until it was paid, had been largely displaced by lenders who originated a

mortgage that they then sold to another intermediary who bundled a large number

of mortgages, or pieces of them, to be securitized. The bundle of mortgages became

the collateral for bonds that were sold around the world. As the system expanded to

global limits, assurance mechanisms became more critical to the continued working

of the system. It was costly for investors in Asia who might be interested in U.S.

originated, mortgage-backed securities to assess the creditworthiness of an original

borrower in a particular Atlanta, Georgia, neighborhood or of the lending institution

that made the original loan. At the same time that global investors were buying U.S.

mortgage-backed securities containing subprime components, those same securities

also looked good to U.S. financial institutions and investors. As a result, U.S. and

other financial institutions began to borrow short and invest long, much as the

savings and loan industry had done before the 1980s collapse.6 All along, market-

derived assurance devices were supplied to reduce the cost of trust formation.

Credible, market-tested, international accounting standards and credit ratings

buttressed or replaced trust between known individuals that otherwise might have

been required. Instead of trusting in individuals or their firms, global investors placed

their trust in credible symbols and rules. With reliance on accounting standards and

credit ratings, the closed system functioned to provide mortgage access to individuals

with different levels of creditworthiness. The supply of different-quality mortgages

responded to market demand. As the appetite for risk increased globally, the quantity

of low-quality, mortgage-backed bonds increased. Quality assurance could be held

constant within the closed system so long as the assurance mechanisms functioned

effectively, which is to say so long as no institutional failure occurred.

The process by which subprime mortgages are originated, securitized, and sold

in international markets contains critical trust-communicating intersections. The first

intersection occurs at the mortgage’s origination, when a potential borrower works

with a lender’s agent to write a mortgage contract. At this stage, both parties have an

6. Anil Kashyap, Raghuram Rajan, and Jeremy Stein (2008) argue that the debt and investment imbalance
was the main contributor to the financial mischief banks brought on themselves. Once defaults began, an
affected bank had to sell mortgage-backed securities to cover losses. This sale reduced market prices for
those securities, which, given mark-to-market accounting rules, forced other banks to write down their
mortgage-backed assets. This write-down in turn led to more sales and a continued downward spiral. In
other words, the composition of balance-sheet assets, coupled with mark-to-market accounting rules, was
a major source of instability. See also Meiners and Yandle 1991 for the argument that the combination of
government-required deposit insurance and partial deregulation encouraged excessive risk taking and
destroyed the industry’s asset base.

350 F BRUCE YANDLE

THE INDEPENDENT REVIEW

incentive to understate the risk. The borrower hopes to get a mortgage with attrac-

tive terms; the originator-agent hopes to earn a commission for closing the deal. The

originator-agent, however, must deal with a hierarchy that imposes quality control.

An officer of the lending firm must approve the deal. A bankruptcy constraint closes

the system. Market-driven constraints affect the standards used when mortgage paper

is approved and sold to be bundled and securitized in a mortgage-backed security.

The bundling financial institution imposes more stringent standards when the secur-

itizing agency imposes stricter standards. When the securitizing agency relaxes stan-

dards, the gate is open wider for originators to make lower-quality loans. Evidence

indicates that standards are relaxed with higher volume and prospects of enlarged

profits (Keys et al. 2008).

In the case of the process leading to the 2007–2009 collapse, the entry of

government-sponsored enterprises—the most important being Fannie Mae and

Freddie Mac—stretched the constraints on the closed system. Viewed as backed by

the full faith and security of the federal government, these two mammoth lenders

expanded the limits of an otherwise closed system. Bankruptcy was no longer seen as a

viable threat. When Fannie and Freddie were instructed by their political masters to

expand their subprime portfolios, standards tended to be relaxed all the way to the

origination process. All else equal, commission-paid originators expanded the hunt

for otherwise less-qualified borrowers. Subprime lending increased. Institutional

failure was begun.

The Washington Mutual experience shows how subprime lending expanded to

the point that the firm became one of the largest mortgage lenders in the United

States and later one of the largest failed banks (Goodman and Morgenson 2008).

Beginning with a major effort in 2003, when interest rates were extraordinarily low,

the firm expanded lending at such a pace that by mid-2007 its subprime lending

reached $4.2 billion. One year later the amount stood at $11.5 billion, and the firm

was bankrupt (Goodman and Morgenson 2008). During the 2003–2008 interval,

Washington Mutual built offices nationwide, paid originators a commission for loans

approved, and reduced standards when approving loans. All of this was possible

because the firm could sell its subprime paper to Wall Street bundlers, who then

securitized the debt, which was sold in global markets.

Two prominent, interrelated assurance devices facilitated the globalization of

U.S. mortgage-backed securities. The first device consisted of the highly visible credit

ratings assigned by the three credit-rating firms—Moody’s, Standard & Poor’s, and

Fitch—which relied on the second device, the uniform application of international

accounting standards.

The function that the credit-rating agencies played became increasingly criti-

cal as financial intermediation shifted from banks, which had internal controls,

to markets that were inherently more impersonal and more reliant on credible third-

party evaluations. The revenue incentives faced by rating agencies that are paid to

classify debt instruments by financial intermediaries worked against the incentive to

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give strictly interpreted ratings.7 By statute, these three rating agencies have the

rating market to themselves; they are a part of a government-mandated cartel.8 Even

though competition may be lacking, if Moody’s, for example, assigned a AAA rating

to a GS Mortgage Securities Corporation bond backed in part by subprime mort-

gages, investors worldwide would be assured that they were not assuming undue risk

when buying the paper. Of course, Moody’s and the other rating firms relied on the

audited records of the underlying firms and on their own assessment of the predicted

payoffs of the mortgages themselves. As Wall Street perfected the production of

consolidated debt obligations, which consisted of a mixture of mortgages of differing

qualities, the rating agencies became more like chefs in the kitchen than purveyors of

quality control. In effect, those constructing the obligations would tell the rating

agency the outcome they desired as they mixed together mortgage instruments of

differing quality. The agency, in turn, would specify the appropriate mix. In the end,

85 percent of the subprime mortgages issued were folded into structured debt

obligations with a AAA rating (Hoenig 2007, 10–13). As Martin Weiss (2007)

describes the situation, the rating agencies were too closely involved in constructing

the product they were rating, had incentives to give higher ratings (and thus earn

higher fees from volume), and were giving AAA ratings to municipal bond insurance

companies, which in turn were passing their AAA rating to bond issuers who bought

their insurance.

The New York Times reported that Moody’s revenue from rating-structured

financial instruments, which include mortgage-backed securities, rose from around

$400 million in 2003 to more than $800 million in 2007 (Morgenson 2008). Along

the way, debt that carried high ratings began to look more like junk—another

institutional failure. As a result, the rating credibility fell, and financial institutions

could no longer rely on the ratings when deciding whether to lend to another

financial institution or not. The term toxic assets entered the vocabulary. A Moody’s

managing director is reported to have stated in a September 2007 internal manage-

ment survey, “These errors make us look either incompetent at credit analysis or like

we sold our soul to the devil for revenue, or a little bit of both” (qtd. in Morgenson

2008). Thus, a key trust-forming device became biased and no longer reliable. Credit

markets tightened.

Biased credit ratings do more than mislead investors; they can also bias the amount

of capital required by financial institutions. Robert Rosenkranz points out: “For every

dollar of equity that insurance companies are required to hold for bonds rated AAA, $3

is needed for bonds rated BBB, and $11 is needed for bonds rated just below invest-

7. On this matter and on the changing nature of financial intermediation, see Hoenig 2007, 10–13.

8. A new element of the potential cartel-generated wealth was described in conjunction with a March
2009 program announced by the Federal Reserve Board (Ng and Rappaport 2009). The new program
involves Fed guarantees of as much as $1 trillion in mortgage-backed securities. According to the Wall
Street Journal, this program would generate rating fees of from $400 million to $1.2 billion for a single
rating firm (Ng and Rappaport 2009).

352 F BRUCE YANDLE

THE INDEPENDENT REVIEW

ment grade (BB). For banks, the sensitivity of capital requirements to ratings is generally

even more extreme.” He goes on to indicate that “regulatory reliance on ratings makes

the rating agencies the de facto allocators of capital in our system” (2009).

With the regulatory recipe for capital specified by ratings provided by the three

rating agencies, mortgage bundlers had powerful incentives to mix subprime mort-

gages with enough AAA paper to yield a AA or, even better, an AAA outcome. The

raters’ regulatory role probably increased the demand for subprime mortgages that

could be bundled, mixed, and matched in consolidated debt obligations, a new Wall

Street product that could be sold in global markets with AAA ratings (Rosenkranz

2009). Of course, when mortgage-default rates went through the roof, AAA took on

a new meaning—or, rather, lost all meaning.9

A challenge also had to be met when dealing with international accounting

standards. These standards were supplemented by Securities and Exchange Commis-

sion rules as interpreted by the Federal Accounting Standards Board (FASB) (“All’s

Fair” 2008, 92). Among the rules is the Fair Value Accounting Standard, more

formally known as FASB 157, adopted in 2007, which specifies mark-to-market

methods of evaluation for financial assets. Various forms of mark-to-market account-

ing rules had been in place since 1994. The rules are intended to provide transparen-

cy to investors and are more meaningful than historic-cost or cash-flow evaluations in

the normal course of doing business when markets for securities under scrutiny are

functioning.10 But when markets lock up, trade ceases, and asset evaluations can

occur only when a financial institution goes through bankruptcy, the beneficial

aspects of mark-to-market become more questionable.11 When asked to comment

on the accounting rule, Nobel laureate Gary Becker, a supporter of mark-to-market

logic in normal times, observed: “[W]hen you have a very thin market, you have to

be very careful about what it means to mark to market. It’s a big problem if you

literally take mark-to-market in terms of prices continuously based on transactions

when there are very few transactions in that market” (qtd. in O’Grady 2009).

To make things more complicated for those who place their trust in financial

statements, mark-to-market rules are not required across the board for all assets (“All’s

9. On January 25, 2009, the Obama team indicated that initiatives were in the works to develop federal
rules governing rating agencies (Labaton 2009). On April 15, the Securities and Exchange Commission
hosted a conference to consider the rating agency issue (Ellis 2009). The conference deals with accuracy,
conflicts of interest when a rating firm is also involved in the construction of a product being rated, how
rating agencies might be rated or regulated, and the relative merits of opening competition for the
dominant agencies.

10. Steve Forbes (2009) argues that mark-to-market accounting rules are the principle cause of the
banking meltdown. He points out that had the accounting rule been in place in the 1990s, almost every
U.S. bank would have collapsed because of shaky Latin America and commercial real estate loans. Ameri-
can Enterprise Institute senior fellow Peter Wallison (2009) provides an alternative accounting rule based
on discounted cash flow over the expected life of the security in question.

11. Stephen Ryan (2008) provides a rigorous description and evaluation of mark-to-market rules in the
context of the financial collapse. On theoretical grounds, he is not persuaded that the rules contributed
significantly to what I term “lost trust.” He does offer suggestions for empirical research that might in part
resolve the question.

LOST TRUST F 353

VOLUME 14, NUMBER 3, WINTER 2010

Fair” 2008, 93). Whether these rules are to be applied depends on the asset owner’s

intentions. If the intention of the bank that owns the asset is actively to trade the asset,

then market value must be used at all times when statements are issued. If the intention

is not to trade, but to hold the asset for later sale, then slightly different rules apply. And

if the intention is to hold a security to maturity, then the asset can be listed at cost.

The upshot of all this is that what might appear to the untrained eye to be

comparable financial statements are not comparable at all. For example, The Econo-

mist magazine points out that at the end of 2007 more than 75 percent of Goldman

Sachs assets were carried at fair value (mark to market), but less than 50 percent of

Morgan Stanley’s assets were so measured, and slightly more than 25 percent of Bank

of America’s assets were stated at fair value (“All’s Fair” 2008, 93). It is theoretically

possible for two banks to have identical assets, but for one bank to have a significantly

different evaluation assigned to its assets. Of course, a sudden revaluation of assets

following another institution’s distress sale, as when Lehman Brothers failed unex-

pectedly or when the Treasury is to institute a government-managed toxic-assets

purchase program, might eliminate critically important reserves, and that elimination

might cause the credit rating of the bank in question to be lowered. Loss of a prime

credit rating might lead to loss of access to credit markets and then to bankruptcy.

Mark-to-market accounting rules had been condemned by Alan Greenspan,

former Treasury secretary Nicholas Brady, Paul Volker, Milton Friedman, and even

Franklin Delano Roosevelt, but not until the rule began to constrain the government

were steps to change it finally taken (McTeer 2009). In March 2009, the rule

brought distress to the Federal Home Loan Bank (FHLB) system (Hagerty 2009).

The FHLB is a congressionally formed system that is owned by commercial banks,

thrifts, credit unions, and insurers that obtain advances from the system for mortgage

lending. In March 2009, the FHLB system reported a fourth-quarter loss of $672

million, which, according to press accounts, was the first loss in twenty years experi-

enced by the twelve regional banks (Hagerty 2009). The losses were generated by

write-downs of mortgage-backed securities required by the mark-to-market rule.

According a Wall Street Journal account of the situation, the “banks plan to hold these

private label securities until maturity and don’t expect to realize major losses on them.

But accounting rules require them to mark the securities to the estimated market value

at a time when very few investors are bidding for such assets” (Hagerty 2009).

A December 2008 Securities and Exchange Commission review of mark-to-

market rules ended with a recommendation that they be maintained; the report

also indicated in a review of multiple episodes that no evidence was found that fair-

value accounting by itself was the proximate cause of a financial institution’s failure

(Crittenden 2008). The conclusion left open the possibility that the accounting rule,

coupled with faulty credit ratings, might have reduced a bank’s access to credit,

which led to reduced ratings and a rush to sell mortgage-backed securities to obtain

cash. As weak assets hit the market and depressed prices, mark-to-market rules put

other institutions in jeopardy. The result was a cascading collapse of creditworthiness.

354 F BRUCE YANDLE

THE INDEPENDENT REVIEW

In this sense, fair-value accounting rules worked to the financial institution’s advan-

tage in rising or stable markets, but did not work so well when markets for entire

asset categories were collapsing. As the accounting-rule debate continued, the kee-

pers of the rule offered a compromise. On March 12, 2009, the FASB chairman

agreed in a U.S. House hearing to issue guidelines that would ease the mark-to-

market accounting rules (Rothmann 2009).

On April 9, 2009, the FASB’s mark-to-market rule was revised (Chasan 2009).

Noting that the new guidelines apply in cases when markets are not active, the FASB

indicated “the changes would be effective for the second quarter period for most U.S.

companies, but early adoption would be permitted for the first quarter” (Chasan 2009).

Political economists might note that the new FASB rules came into effect at just the

right moment to accommodate the Obama administration’s expanded plan to purchase

distressed mortgage-backed securities currently held by financial institutions.

Because of the trust complications associated with credit ratings and accounting

rules and the explosive growth of mortgage-backed securities from 2003 to 2007,

the market delivered another device for assuring trust, the credit-default swap (CDS),

a name that hides the fact that the device is an insurance contract sold by one investor

to another to cover the risk of default on the debt of a particular firm or public unit

covered by the contract. The market did not rush to CDSs voluntarily. Regulators

required CDSs to offset the risk associated with mortgage-backed securities held on

the books of financial institutions (Kessler 2009). The CDSs transmitted the credit

rating of the firm issuing them. For example, AIG with a AAA credit rating sold

CDSs to banks and other financial institutions, as required by bank regulators. As a

result, there were CDSs for Morgan Stanley securitized bonds. If the bonds covered

became shaky, the price of the CDSs would rise, signaling the presence of a problem.

CDS prices could be a far more effective monitor of creditworthiness than the

infrequently changed ratings given by the rating agencies. When the price of CDSs

rose because of perceptions that risk had risen for the insured bond, the credit rating

of the original issuer of the mortgage-backed bond was reduced. In fact, movement

of CDS prices could predict later changes in credit ratings (“Pressure Gauge” 2008).

With regulators requiring CDSs, the volume of CDSs grew rapidly during the

subprime heydays, rising in gross value from $4 trillion in 2003 to more than $62

trillion in August 2008.12 A high-volume market developed in which CDSs were

traded (“Pressure Gauge 2008”). Although volumes were excessive, CDSs were a

trust-forming innovation. They and their prices supplemented credit ratings and

accounting information, at least until the bottom fell out, as it did in September

2008, when AIG got into trouble. But even afterward, as newly inspired regulatory

12. For comparison purposes, note that $16 trillion of life insurance was in force in the United States in
2002, and world gross domestic product was approximately $56 trillion. CDSs, however, are more like life
insurance than gross domestic product, unless there is systemic default, a similar outcome to a plague.

LOST TRUST F 355

VOLUME 14, NUMBER 3, WINTER 2010

threats were forming, CDSs continued to insure assets of uncertain quality, including

U.S. government bonds. (“Credit Default Swamp” 2009).

For insurance of any form to be viable, the contract writer—the underwriter—

must be able to forecast expected losses and set prices or premiums so that the

revenues generated will cover operating costs and expected losses. When based on

actuarial experience and the large-numbers principle, insurance works, except when

many insured parties simultaneously suffer catastrophic losses. Insurance for payment

of subprime mortgages will work as long as a predicted number of mortgage bor-

rowers default, but when large numbers default in an undiversified portfolio, the

insurer may find itself in great trouble.

The September 15, 2008, failure of Lehman Brothers and the resulting political

cries of crisis generated chaos in the CDS and other markets. One key player, AIG,

the world’s largest insurance company and the major seller of CDSs, was brought to

its knees when rating agencies downgraded its debt, forcing the firm to pass $14

billion in collateral to debt holders. The problem did not stem from the firm’s

financially strong traditional insurance business, but from its CDS business. Later in

the day, the federal government seized AIG, initially lent the firm $85 billion, later

raised the investment to $122 billion, and claimed an 80 percent equity stake in the

firm. AIG was nationalized. Within twenty-four hours, the shares of Morgan Stanley

and Goldman Sachs were hammered as the firms scurried to find new financial

partners who might take a position with them large enough to avoid bankruptcy.

Morgan Stanley and Goldman Sachs ultimately survived, but not without the assis-

tance of the U.S. Treasury and a transformation from investment bankers to universal

banks with access to government insurance. By then, Wall Street’s big five dealer-

investment bankers—Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill

Lynch, and Morgan Stanley—had either disappeared through bankruptcy, been ac-

quired by a commercial bank, or were transformed into banks with new access to

deposit insurance and the Fed’s loan window.

Market-generated assurance devices distorted during the subprime heyday lost

their quality-assurance capabilities. As Fukuyama had forecast, hierarchies replaced

trust as the federal government became the owner of AIG, a dominant lender and

equity owner of General Motors, Chrysler, and GMAC, and 20 percent owner

of the equities in the U.S. commercial banking system.13 But the demise of trust

devices did not end with those directly associated with mortgages, mortgage

lending, and the world market for mortgage-backed securities. The failing financial

markets also brought down every major insurer of municipal bonds. Started in

13. The Federal Deposit Insurance Corporation (FDIC) publishes its Quarterly Banking Profile and posts
to its Web site. The November 25, 2008, data indicate total equity capital and reserves for all FDIC-
insured commercial banks and savings institutions of slightly less than $1 trillion. SNL Financial in
Charlottesville, Virginia, reports that as of November 12, 2008, Troubled Assets Relief Program commit-
ments of $212.7 billion has been made to various institutions across the nation (see http://www.snl.com/
bank). The amount committed is approximately 20 percent of the total equity.

356 F BRUCE YANDLE

THE INDEPENDENT REVIEW

the 1970s, bond insurance enables an issuer of municipal bonds to enjoy the AAA

credit ratings of the insurers and thus to pay lower interest rates by buying insurance

from one of the major bond insurers. The credit-rating enhancement afforded

to municipalities by bond insurers reduces the scrutiny that rating agencies might

otherwise apply when rating insured bonds: the rating agencies can merely re-

port the insurers’ credit rating. In recent years, municipalities have paid approximately

$2.5 billion annually in insurance premiums to firms that include MBIA, AMBAC, and

Fidelity Guarantee Insurance (Richard and Preston 2006). Bond issuers presumably

save at least that much in interest costs. Yet in the $2.26 trillion municipal-bond market,

hardly any bond issuer ever went belly up—at least until recently.

The insurance idea is straightforward: the insurance companies review the finan-

cial strength of cities, counties, states, and other bond issuers and charge a premium

for their services. They then guarantee that the principle will be paid in the event of

bankruptcy. With AAA ratings obtained through insurance, investors worldwide have

no reason to check whether Richland County Georgia Hospital Bonds are OK.

Insurance transmits the assurance. But the bottom began to fall out early in 2008,

when defaults on subprime mortgages affected a new line of business offered by the

municipal-bond insurance companies. These companies were insuring mortgage-

backed securities. The value of the subprime mortgage-backed assets held by the

insurance companies began crumbling, which caused rating agencies to take away

their AAA ratings or, worse, to rate their debt as junk (Weiss 2008).

Municipalities that had enjoyed the AAA ratings through purchase of insurance

suddenly found themselves facing substantial increases in interest costs. For example,

Bloomberg reported that Park Nicollet Health Services in Minneapolis would most

likely have to pay an extra $5 million in 2008 because interest doubled on its floating-

rate debt (Braun 2008). The interest rates on the bonds, insured by AMBAC, rose

from 3.06 percent to 6 percent. The hospital had anticipated enjoying AAA interest

rates for thirty years. In a matter of days, another one hundred hospitals suffered the

same blow. A few weeks later, the municipal-bond auction market froze solid. This

market, where floating-rate bonds are frequently sold and short-term interest rates

are determined, simply stopped functioning. As William Selway put it, “The auction-

rate market came unhinged as losses tied to subprime mortgage bonds and related

securities threatened bond insurers’ AAA ratings, causing investors to shun the secu-

rities they backed. These bond insurance companies guaranteed about half of the

$2.6 trillion of outstanding state and local government debt” (2008). With the

collapse of municipal-bond insurance, yet another assurance device bit the dust.

Final Thoughts

The great financial collapse of 2007–2009 is a watershed in the development and

destruction of market-based morality. The seeds for the collapse were planted when

politicians distorted market operations through political pressures and subsidies to

LOST TRUST F 357

VOLUME 14, NUMBER 3, WINTER 2010

make house ownership affordable even for individuals who could not afford to own

houses. But government programs that mandated the expansion of house-ownership

opportunity were not enough to generate a later subprime crisis. Money had to enter

the picture. The Federal Reserve accommodated the politically engineered increase in

demand for housing by expanding the availability of credit. Interest rates dropped

and remained extraordinarily low for several years. Although necessary, expanded

credit was not sufficient alone to generate a global market for mortgage-backed

bonds that would keep funds flowing to subprime borrowers. Assurance devices had

to be invented to extend the market.

Markets expanded when trust was formed, and they collapsed when the politically

distorted assurance devices failed to function. In the process, government, the lender of

last resort, also became the owner of last resort. Political expediency has displaced

market-based morality. Wealth creation has been put on hold. Once again, a crisis has

generated a government response that leads predictably to permanent expansion of

regulation, which will predictably take the place of market-driven trust devices.

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Acknowledgments: I thank Dan Foster, Jody Lipford, Roger Meiners, Richard Williams, and an anony-
mous referee for helpful comments and criticisms. A special note of appreciation is extended to Daniel
Klein for his assistance in clarifying my discussion of trust by directing me to his work on assurances and to
John A. Allison for many helpful conversations on the financial market collapse (see Allison 2008).

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IDPR, 31 (4) 2009 doi:10.3828/idpr.2009.5

Yefang Huang

The growth of global hub port cities under
globalisation
The case of Shanghai international shipping centre

Yefang Huang is a Senior Instructor in the Department of Geography and Resource Management, The Chinese
University of Hong Kong, Shatin, NT, Hong Kong; e-mail: lucy-huang@cuhk.edu.hk

Paper submitted June 2008; revised paper received and accepted September 2009

This article takes the Shanghai international shipping centre as a detailed case study of the relations
between port and city. The relationship between port growth, economic development and foreign trade
is examined in detail. The article argues that the success of urban development in Shanghai results from
both the favourable market opportunities and the rational urban development strategies pursued by the
city government of Shanghai. Massive foreign direct investment in Shanghai has resulted in large-scale
outward-processing activity and explosive growth in imports and exports. The article shows that the Asian
hub port-city consolidation model has ignored the differences between port cities in the region. Three
models of global hub port-city are proposed to describe the different cases of Hong Kong, Singapore
and Shanghai. Shanghai fits the model of a city-serving global hub port-city, which is different from Hong
Kong and Singapore. This reflects the particular stage of hub port-city development of Shanghai and its
particular economic relationship with the hinterland.

Rapid urban development in Shanghai has caught the attention of many scholars. In
the context of socialist transitional economies, central and local states are considered
important driving forces in the rapid rise of Shanghai (Zhang, 2002; Wu, 2000). The
importance of geographical conditions and external forces such as FDI (foreign direct
investment) in the rapid development of Shanghai have also been recognised (see, for
example, Wei and Leung, 2005; Wei et al., 2006; Yusuf and Wu, 2002).

Since international trade relies predominantly on shipping, port cities play a
crucial role in the development of regional economies. The ten largest cities in the
US in 1920 were developed as port cities, and most of them remain important even
though their ports have become less important relative to other economic activities
(Fujita and Mori, 1996; Ducruet and Lee, 2006).

The explosive growth in world trade associated with the spatial dispersion of
production and consumption during the past 40 years has resulted in the emergence
of several giant ports in Asia, including Singapore, Hong Kong, Shanghai and
Shenzhen (Airriess, 2001a; 2001b; Loo and Hook, 2002; Chu, 1994; Shen, 2008a; Lee
et al., 2008). The global production network is shaping and being shaped by a global
port system (Airriess, 1993; Hesse and Rodrigue, 2006; Lee and Rodrigue, 2006).
Global manufacturing capacities have been relocated dramatically from developed
countries to developing countries through large-scale FDI, necessitating the large-

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scale intercontinental shipping of raw materials, components and consumer goods.
Due to keen competition, there is a global trend towards the concentration of liner
services at hub ports (Cullinane et al., 2004).

Propelled by China’s WTO (World Trade Organization) entry, the Chinese
economy is rapidly integrating with the world economy. The most rapid economic
development and export growth has taken place in three coastal regions, including the
Pearl River Delta (PRD), the Yangtze River Delta (YRD) and the Bohai Ring region,
creating great demand for international shipping services (Shen, 2008a; Yeung and
Shen, 2008a; 2008b; Luo and Shen, 2009). There is a good opportunity for developing
a few large container ports in coastal China. Various cities are keen to compete for
such hub ports (Cullinane et al., 2004; Shen, 2007; Luo and Shen, 2009).

Many studies have examined the changing relations between port and city (Hoyle,
1989; Lee et al., 2008; Notteboomm and Rodrigue, 2005; Ducruet and Lee, 2006).
Lee et al. (2008) provided a comprehensive review of the changing relations between
port and city in developed and developing countries. In contrast to a Western port-
city model, they proposed an Asian hub port-city consolidation model. But very few
studies have focused on Shanghai port, although Wang and Slack (2004) analysed
port governance in China using Shanghai port as a case study. They found that the
central and local governments are still playing key roles in reforming ports and other
components of the transport logistics system.

This article argues that the success of city and port development in

Shanghai

results from favourable market opportunities and the rational development strategies
pursued by the city government of Shanghai. It will examine the relationship between
port and city development in Shanghai. Different from mega-hub ports such as Singa-
pore and Hong Kong, throughput in Shanghai port mainly relies on its own cargo
with little trans-shipment (Fremont and Ducruet, 2005). Lee et al.’s (2008) Asian hub
port-city consolidation model has ignored the differences between Asian port cities.
Three models of global hub port-city will be proposed in this article to describe the
different cases of Hong Kong, Singapore and Shanghai. The article will contribute
to a better understanding of port and city development in developing countries,
especially China.

The rest of article is organised as follows. The next section will discuss globali-
sation, the transport revolution and changing port–city relations. The article then
describes the opening and development of Shanghai in the reform period to provide
a background. The following two sections examine the development of Shanghai’s
international shipping centre and analyse the relationship among port growth,
economic development and foreign trade. This is followed by a discussion on the
models of global hub port-cities. Some conclusions are reached in the final section.

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The growth of global hub port cities under globalisation 425

Globalisation, transport revolutions and changing port–
city relations
The world economy is driven by trade, which is facilitated by transportation and
logistics services. ‘Shipping’ is the physical process of transporting goods and cargo
by land, air and sea. Shipping by sea is the most important and economical form of
cargo transportation, especially over long distances. In this article, only shipping by
sea is considered, and thus ‘shipping’ generally refers to shipping by sea. Ports are
terminals that receive ships and transfer cargos. The ‘shipping industry’ refers to the
whole business of shipping, which generally develops in port cities. Cities get access to
shipping services via ports, so the location of ports has major implications for trans-
portation and trading. As a result, ports and cities have close relations.

Globalisation and technology improvements are important forces of change in
the spatial patterns of the world’s port system. The world economy has been shaped
by economic globalisation, with increasing flows of capital, trade and information
assisted by deregulation and technological innovation (Airriess, 2001a; Li and Gray,
2002). Global and regional production and trade networks have been formed, and
require more sophisticated cargo transportation.

Transportation revolutions such as containerisation, expanding the size of ships
and intermodalism,1 as well as shipping alliances, result in competition and coopera-
tion in the port industry. To increase efficiency, shipping lines seek to concentrate
their services in a few hub ports. As ships can move easily, shipping lines have great
freedom to choose ports. Thus ports are forced to build deep-water terminals and
expand back-up areas to enhance competitiveness. As a result, there is greater traffic
concentration in several hub ports (Lee et al., 2008).

Generally, the port industry has become less important in Western cities, which
are increasingly based on services rather than manufacturing. For example, the port
area of New York was stagnant after the growth period of 1900–50. Its total trans-
shipment of goods declined from 115 million tons in 1979 to 41 million tons in 1995
(Meyer, 1999). As containers can be moved from one port to many destinations via the
seamless intermodal system using various modes of transportation, port activities tend
to be concentrated, resulting in strong competition. For example, port authorities have
initiated and supported the competition between Baltimore and Hampton Road for
the position of mid-Atlantic load centre (Starr, 1994).

In developing countries, ports originated from fishing and naval harbours. Colonial
ports were established in existing cities with deep water, large spaces and good connec-
tions between the foreland and the hinterland. Previous studies have shown increasing
levels of port concentration, but port cities in developing countries are less negatively

1 Intermodalism refers to the movement of international shipments via containers using sequential transportation
modes such as water, air and land.

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affected by globalisation (Lee et al., 2008; Notteboomm and Rodrigue, 2005).
Historically, there has been a close relationship between the growth in demand

for freight and passenger traffic, and economic growth (Airriess, 1993; Hesse and
Rodrigue, 2006; Lee and Rodrigue, 2006; Banister and Berechman, 2001; Fujita and
Mori, 1996). Port growth is driven by economic growth in the city and its hinterland.
In city-regions, such as the Hong Kong-PRD region, rapid expansion in industrial
production and international trade has stimulated the growth of leading container
ports, including Hong Kong and Shenzhen. The growth of ports, shipping and trade
services in turn stimulated the growth of service sectors such as logistics and financial
services (Shen, 2008a; Yeung and Shen, 2008a). Thus port cities are well placed to
act as growth centres and as centres of innovation and modernisation (Gleave, 1997).
Consequently, the shipping industry is a very important sector in some major cities in
the world, including Hong Kong, Singapore and Shanghai in Asia. As in Singapore,
Shanghai’s government considers the development of the port as an integral process
of urban development and takes a leading role in the development of port infrastruc-
ture (Airriess, 2001a).

Generally, ports can be categorised into hub ports, non-hub ports and feeder ports
according to their role in regional or international shipping services (Wang and Slack,
2004). A hub port is an international shipping centre that offers cross-ocean interna-
tional shipping services with connections to feeder ports for trans-shipment. Feeder
ports do not have cross-ocean services but are connected with hub ports by river and
coastal vessels. Non-hub ports may have limited cross-ocean services and connections
with feeder ports.

The term ‘international shipping centre’ is used in China and refers to an impor-
tant hub port-city that is equipped with a container hub port and has a strong shipping
industry (DWTMC, 1999, 75). The container hub port is the most important hardware
in an international shipping centre.

There is an inherent connection between a shipping centre, a trade centre and
a financial centre. The history of urban development shows that an international
financial centre is developed on the basis of advanced trade business (Reed, 1981).
Thus becoming a strong international trade centre is a precondition to becoming an
international financial centre. This is because financial services are induced by the
trading of goods and services in the modern economy. But an international trade
centre, especially those – such as Hong Kong – based on tangible goods, relies on an
international shipping centre for logistics services. As location and site selection of an
international shipping centre is much more stringent than that of an international
trade centre, the international trade centre often follows the location of an inter-
national shipping centre rather than vice versa.

According to the neoclassical port-city model, economic activities are often
concentrated in port cities which will become dominant national cites (Hoyle, 1989;

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The growth of global hub port cities under globalisation 427

Fujita and Mori, 1996). Most world-class economic, financial and trade centres serve
concurrently as international shipping centres today. For example, four well-known
international trade and financial centres, New York, Tokyo, Singapore and Hong
Kong, are also international shipping centres, although the shipping industry in New
York has passed its peak (DWTMC, 1999). Thus port development and urban devel-
opment depend on each other as ports support the essential logistics and shipping
services of large urban centres.

Many studies have examined the changing relations between port and city (Hoyle,
1989; Lee et al., 2008; Notteboomm and Rodrigue, 2005; Ducruet and Lee, 2006).
Lee et al. (2008) provided a comprehensive review of the changing relations between
port and city in developed and developing countries. The Western port city model
proposed by Hoyle (1989) has five stages. In the first stage of primitive port-city, there
is close spatial and functional association between city and port. In the second stage
of expanding port-city, rapid commercial and industrial growth forces the port to
develop beyond the city confines, with linear quays and break-bulk industries. In the
third stage of the modern industrial port-city, industrial growth – such as oil refining
and introduction of containers and ro-ro (roll-on, roll-off) – requires space and the
separation of city and port. In the fourth stage of retreat from the waterfront, changes
in maritime technology induce the growth of separate maritime industrial develop-
ment areas and the port no longer uses the waterfront in the city. In the fifth stage
of redevelopment of the waterfront, urban renewal takes place in the waterfront of
the old port. Large-scale modern ports consume large areas of land/water space and
develop separately. Lee et al. (2008) added the sixth stage of a general port-city, where
there is rising environmental concern for intermodal transport and the city economy
develops like non-port cities.

Lee et al. (2008) proposed an Asian hub port-city consolidation model, arguing
that the Western model is not appropriate. The first stage is a fishing coastal village
with self-sufficient local trade. The second stage is the colonial city-port developed by
dominant external interests for raw product exploration and geopolitical control. The
third stage is the entrepôt city-port. With trade expansion and entrepôt function, the
modern port develops through land reclamation. The fourth stage is the free trade
port-city. Export-led policy attracts industries using port facilities through tax-free
procedures and low labour costs. The fifth stage is hub port-city. Port productivity
increases due to hub functions and the need to grow within a limited port area due to
territorial pressure close to the urban core. The sixth stage is the global hub port-city.
The old port maintains its activity and a new port is built due to rising costs in the hub
and possible hinterland expansion.

According to Lee et al. (2008), a common aspect of all Asian ports is the formation
of new ports, but a major difference from Western port cities is that there is increasing
port activity in the original port areas close to the city centre in Asian port cities. This

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is because the centres of Asian cities remain the most active and important economic
centres. In Western countries, the volume of local cargo and port functions have
declined due to de-industrialisation. Ports have been encouraged to move from the
inner city to outer areas to leave waterfronts free for leisure and service functions for
urban residents (Lee et al., 2008).

Although Asian port-city models show the difference between Western and Asian
ports clearly, the differences between the Asian port-cities are ignored. Singapore,
Hong Kong and Shanghai are three giant hub ports in Asia. Lee et al. (2008) examined
Hong Kong and Singapore as global hub ports with high intermediacy (connection
between different scales of a transport system) and centrality. Shanghai has more
recently been acknowledged as a significant hub port and is located within the YRD. It
is an emerging world city with a significant manufacturing sector. Due to the different
positions of Hong Kong, Singapore and Shanghai in the world economy and inter-
national shipping, this article will use Shanghai to demonstrate that Shanghai’s global
hub port-city model differs from that of Hong Kong and Singapore. The article now
turns to the context and the development of Shanghai international shipping centre.

Opening and development of Shanghai in the reform
period
Shanghai was the biggest financial, trade and industrial centre in China and the
Far East before the foundation of the People’s Republic of China (PRC). It has also
been the most important port-city since the end of the nineteenth century. After the
foundation of the PRC in 1949, Shanghai was turned into an industrial and economic
powerhouse. It dominated the national economy in manufacturing, commerce and
international trade between 1949 and 1978. Its fiscal revenue accounted for one-sixth
of the total revenue of the Chinese government up to the beginning of the reform
(Yeung and Sung, 1996). Shanghai was also famous for its economic efficiency and
quality products. Its economic and technological achievements are attributed to its
superior endowments, including an experienced labour force, superior managerial
and technical skills, an established industrial foundation, higher productivity, social
infrastructure and good supporting facilities (Yeung and Sung, 1996; Tian, 1996;
Hyslop, 1990). However, China had little foreign trade and the Shanghai port mainly
served domestic transportation between 1949 and 1978. International shipping services
increased only after 1978.

Shanghai experienced relative stagnation and even setbacks during the 1980s
(Yeung and Sung, 1996). The central government was very cautious about granting
SEZ (Special Economic Zone) autonomy to Shanghai (White III and Cheng, 1998).
Only after 1990, when Shanghai was granted a status similar to Guangdong through
the Pudong New Area policy, did it start to achieve fast urban development.

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The growth of global hub port cities under globalisation 429

The development of the Pudong New Area is central to Shanghai’s ambition to
become the leading industrial, financial and trading centre in China and the world
(Wu, 1999). ‘Infrastructure goes first’ has been a government strategy since the early
1990s. A package of major projects has been completed. The core projects include
‘three ports’ (a deep-water port, an airport and an infoport); ‘three networks’ (a rail
network, an urban highway network and a cross-river transportation network); and
‘three systems’ (a power supply system, a natural gas supply system and a central
heating system). The traditional commercial areas have also undergone massive
redevelopment.

The investment environment in Shanghai has been improved greatly. It has become
a prime destination for foreign investment and a major commercial and business
centre. Significant amounts of domestic and foreign capital have been invested in
Shanghai, especially since 1992. Its foreign trade has risen rapidly since 1979. The
annual growth rate of the total value of imports and exports was 19.71 per cent in
1985–2006 (Table 1).

Economic indicators 1985 1990 1995 2000 2004 2006

GDP (RMB billion) 46.7 75.6 246.3 455.1 745.0 1036.6

GDP per capita (RMB) 3764 5891 17323 19786 46298 57052

Investment in fixed capital (RMB billion) 11.9 22.7 160.2 187.0 308.5 392.5

Foreign capital actually utilised (US$million) 1.15 7.80 52.98 53.91 65.41 71.07

Total value of import and export (US$billion) 5.2 7.4 19.0 54.7 160.0 227.5

Table 1 Main economic indicators in Shanghai

Source: SMSB (2005; 2007). GDP per capita is calculated on the basis of usual residents, including temporary
population

Table 1 also shows dramatic economic growth in Shanghai. Its GDP reached
RMB1,036.6 billion and its GDP per capita reached RMB57,052 in 2006.2 With only
1 per cent of China’s population, Shanghai accounted for 5.5 per cent of its GDP, 4.4
per cent of investment in fixed capital, 9.5 per cent of cargo throughput, 10.8 per cent
of foreign capital actually utilised and 24.5 per cent of the total value of imports and
exports in 2004. Indeed, it has become an emerging world city (Wu, 1999; 2000; Shi
and Hamnett, 2002; Huang et al., 2007).

At the very beginning of Shanghai’s take-off in the 1990s, the central govern-
ment endorsed a grand strategy to develop international economic, trade, financial
services and shipping centres in Shanghai. These four centres are mutually supportive
and make Shanghai stronger than any single centre would. The city made significant

2 US$1 =RMB7.9718 in 2006 (National Bureau of Statistics, 2007).

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progress in the development of four centres during the tenth and eleventh five-year
plan periods (2001–10). The next section will examine the development of Shanghai
international shipping centre and its relationship with urban development.

Development of Shanghai international shipping centre
Opportunities for port development

Developing an international shipping centre is a key part of urban development
strategy in Shanghai. The rationale behind this strategy can be understood from
the relationship between hub port development and urban development, which was
discussed earlier in the article. Figure 1 summarises the major factors contributing to
the growth of the international shipping centre in Shanghai.

As shown in Figure 1, the open door policy and Pudong New Area development
have stimulated FDI, manufacturing and international trade in Shanghai, providing
significant opportunities for the development of an international shipping centre in
the city (Airriess, 1993; Yeung and Shen, 2008b).

Figure 1 Formation factors of Shanghai international shipping centre

Source: SMSB, 2007

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The growth of global hub port cities under globalisation 431

Furthermore, the YRD is one of the most advanced economic regions in China.
There is also rapid economic and export growth in these cities. Much of the trade
and export income in the YRD relies on the port of Shanghai. The total exports from
Shanghai and the YRD, respectively, reached US$64.3 billion and US$201.7 billion
in the first half of 2007 (Shanghai Statistics, 2007). Thus, as Shanghai and the YRD
are major exporters of manufactured products, there is a great need to develop a
leading international shipping centre in or near Shanghai. As discussed before, the
world port system shows a strong tendency towards concentration in some global hub
ports due to changes in shipping technology and organisation (Lee et al., 2008). Port
competition has also emerged in the YRD for the status of leading global hub port.
Shanghai and Ningbo have the natural conditions to develop large seaports (Wang
and Slack, 2004).

Various factors and considerations give Shanghai an advantage in developing the
most important international shipping centre in the YRD. First, it has an advantageous
geographical environment. Located in the mouth of Yangtze River (6,300 kilometres
long) and the middle of the coastal area in eastern China (with a 1,800-kilometre
coastline), Shanghai has a vast hinterland and is a centre for business and cargo
distribution by land, river and sea. Second, Shanghai has a long history of being
the national economic centre and was a treaty port (colonial city port) in the period
1845–1949. Many investors have great confidence in investing in Shanghai, which
further reinforces its urban development potential.

Development of port infrastructure led by the government
Due to these favourable conditions, the Shanghai government has adopted an
ambitious strategy of port development with heavy investment. Thus Shanghai
port has experienced significant growth both in port infrastructure and container
throughput. It is now the largest multipurpose port in mainland China and one of
the leading ports in the world, consisting of port facilities at the mouth of the Yangtze
River, the Huangpu River and the northern part of Hangzhou Bay.

As early as the 1930s, Shanghai was a world-renowned shipping centre in the Far
East. Shanghai was the largest port in mainland China during the Maoist period
between the 1950s and 1970s, but its international status gradually declined in that
period. Since the introduction of reform and open door policies in China in 1978, port
development in Shanghai has sped up. More significantly, the Chinese government
approved the overall urban planning of Shanghai in the early 1990s with the clear
strategic goal of developing international economic, financial, trade and shipping
centres there. Soon afterwards, a grand blueprint for the Shanghai international
shipping centre was drawn up by the government. The policy position of the central
government helps Shanghai overcome potential competitors from nearby cities. For

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Yefang Huang432

example, the central government endorsed the development and administration of
the Yangshan container port by Shanghai, although the port is located in Zhejiang
province.

Shanghai started as a fishing village. The initial river port was located in the
Suzhou and Huangpu rivers. It grew along with the city, and additional port terminals
have extended along the Huangpu towards the mouth of the Yangtze in the twentieth
century. In the 1980s, a special river port for the transportation of raw materials was
built on the south bank of the Yangtze for the largest steel project, Baosteel, in China.
A sea port was built at Xiaoyangshan Island in 2005. Thus the current Shanghai port
consists of both a sea port and an inland river port (see Figure 2).

The old river port of Shanghai was constrained by water depth. The water in

Figure 2 Ports in Shanghai
Source: SMSB, 2007

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The growth of global hub port cities under globalisation 433

the Yangtze estuary is only seven metres deep, and the third and fourth generation
container ships could come in and out freely only at high tide. The depth of the
water on the Huangpu is only seven to eight metres. The river is too narrow and
container ships cannot turn around freely. Even with dredging in the 1990s, the access
of large-scale container ships (1,400 twenty-foot equivalent units [TEUs]) to the port
was restricted by its limited depth. Several attempts have been made to improve the
capacity of Shanghai port since the 1990s, including the deepening of the Yangtze’s
mouth, the Waigaoqiao deepwater port project in Pudong New Area, and the
Yangshan deepwater port project. In the period 2001–05, over RMB10 billion was
invested in port construction.

The Phase I channel renovation project at the Yangtze River mouth was officially
started in January 1998. Its aim is to facilitate the construction of container terminals
at the river mouth, so as to accommodate ultra-large container ships in the future. In
accordance with the plan, the river mouth channel has been deepened from 7 metres
to 12.5 metres in the past 10 years.

The Waigaoqiao deepwater project at the mouth of Yangtze River was started in
1993. Its aim was to develop a port area of 1.63 square kilometres with a water depth
of 13 metres, capable of accommodating four ships (4,000 TEUs each) at the same
time. Waigaoqiao Free Trade Zone was established to make use of the port facility.
However, there were concerns regarding the feasibility of maintaining a 13-metre
depth due to the silting of the river.

Due to the difficulty of maintaining water depth in the Huangpu and the Yangtze,
and the rapid growth of container volume, the Yangshan deep water port project was
finally chosen as a long-term solution to fulfil the ultimate goal of developing Shanghai
as an international shipping centre. The project was approved by the State Council
in May 2001 based on three feasibility reports submitted by Shanghai, Zhejiang and
Jiangsu on possible deep water ports in their territories (Wang and Slack, 2004).
Without this project, the growth of Shanghai port could have been constrained in the
near future; Shanghai could have been replaced by Ningbo port, which has a superb
water depth of 12.5 metres in its existing terminals, and 22 metres just 500 metres
offshore. All the shipping lines are enthusiastic about the Yangshan port, indicating in
a consultancy study that they would use it. This commercial support is critical in the
development of container hubs such as Singapore (Airriess, 2001a; Slack, 1993). On
the other hand, the Yangshan project was heavily subsidised by the Shanghai govern-
ment, which funded the toll-free, 32.5-kilometre Donghai Bridge to make the port
attractive. The cross-sea bridge will connect Shanghai’s Luchao port and Yangshan
port in the East China Sea.

Shanghai government and its SOEs (state-owned enterprises) led the investment
in Yangshan port. The central government did not provide any financial commit-
ment to the project, and it gave approval to the 36-kilometre Hangzhou Bay Bridge,

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Yefang Huang434

the longest trans-oceanic bridge in the world, to link Ningbo port with the YRD to
compete for cargos with Yangshan port. The bridge opened on 1 May 2008. The total
investment in the bridge is RMB11.8 billion, with 28.64 per cent of the registered
capital raised from private companies (Lai, 2008). The container operators in Ningbo
port reimburse the bridge toll to container trucks to attract cargo.

Yangshan is the largest port ever built in China. It is also completely separated
from the urban centre of Shanghai, which may reduce the negative impact of a
busy container port on an urban neighbourhood. It seems that the need to find a
suitable port site, rather than environmental considerations, drove the changes of port
location in Shanghai, while both factors may have contributed to port relocation in
the developed and developing countries (Lee et al., 2008). The building of express-
ways has also reduced the necessity to locate container ports in city centres, although
some old river ports in Huangpu River are still in use.

The Yangshan project includes three main parts: the Yangshan deep water port,
Donghai Bridge and Luchao New Harbour City.

Yangshan deep water port
Yangshan deep water port is located at Xiaoyangshan Island at the mouth of
Hangzhou Bay in Zhejiang Province, 27.5 kilometres away from Luchao Port in
Shanghai’s Nanhui district. The whole project consists of four phases of construc-
tion. Phase I, designed to handle the world’s largest container ships (with 8,500 TEUs
each), was completed and opened in mid-December 2005. Phase II construction was
completed in September 2007. Phases I and II have a total of 9 container berths on a
3-kilometre dock with water depth of 16 metres, and an annual handling capacity of
over 5 million TEUs. Phase III has 7 berths on a 2-kilometre dock, with a total invest-
ment of RMB15.6 billion. Phases IIIA and IIIB were completed by the end of 2007
and 2008 respectively. The whole project will be completed by 2020. It is expected
that more than 50 container berths, capable of handling fifth and sixth generation
container ships, will be built in total. The annual handling capacity of the deep water
port will increase to around 25 million TEUs.

Donghai Bridge
Donghai Bridge opened to traffic on 15 December 2005. Luchao Harbour City is
intended to be a world-class modern harbour city, providing offices, housing, and
commercial and recreational facilities for people working in Yangshan port.

Yangshan Port
Shanghai International Port (Group) was founded on 8 July 2005 on the basis of the
Shanghai Port Authority. It absorbed the Shanghai Port Container company on 26
October 2006. The company is owned jointly by the state (including several SOEs) (70
per cent), and China Merchants Holdings (30 per cent). It controls all the container

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The growth of global hub port cities under globalisation 435

ports in Shanghai, including a few joint ventures. It owns 40 per cent of Shanghai
Waigaoqiao Free Trade Zone Port Company, and 50 per cent of Shanghai Container
Terminals (the other 50 per cent being owned by Hutchison Ports Shanghai). The
company handled 60.42 per cent of cargo throughput and 100 per cent of container
throughput in Shanghai in 2005 (Board of Governors of Shanghai International Port
and Board of Governors of Shanghai Port Container Company, 2006).

Shanghai port has developed and extended from a port along the Huangpu River
to Waigaoqiao port on the southern bank of the Yangtze and then to Yangshan deep
water port. These port projects, together with the existing Pudong International
Airport and the highway and railway, signify the formation of an advanced logis-
tics centre in Shanghai, as planned by the government. Clearly, the development of
Shanghai port is the result of great opportunities and government strategies in port
development.

The relationship between port growth, and economic
development and foreign trade
This section examines the growth of throughput and the relationship between port
growth, and economic development and foreign trade. Figure 3 shows the cargo
throughput of Shanghai port between 1978 and 2006. The throughput was only 79.55
million tons in 1978, well behind other international ports. The period of 1984–98 saw
stable growth, followed by rapid growth after 1998 due to dramatic economic growth.
By 2005, Shanghai had eclipsed Singapore as the largest port in the world. In 2006,
its cargo throughput reached 537 million tons.

Figure 3 Cargo throughput in Shanghai port between 1978 and 2006
Source: SMSB, 2007

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Yefang Huang436

In line with developments in the global port industry, Shanghai has sped up its devel-
opment of container transportation (DWTMC, 1999, 57). The container throughput
was only 8,000 TEUs in 1978. It surged to over 1 million TEUs in 1994, over 5 million
in 2000 and over 21 million in 2006 (Figure 4). The container throughput of Shanghai
has increased more than 40-fold since 1990. The average growth rate of the container
throughput was 24.30 per cent per year in 2003–06. Shanghai became the largest
container port in China, and in the world rankings rose significantly from seventh in
1999 to third in 2003 and second in 2007 and 2008, with container throughput of 28
million TEUs. The gap in container throughput between Shanghai and Singapore
was only 1 million TEUs in 2008.

The rapid growth of container throughput is also propelled by containerisation.
The rate of containerisation is defined as container cargo as a proportion of total
cargo throughput. It was as low as 1.63 per cent in 1985, but increased dramatically to
36.7 per cent in 2005. In fact, of the RMB10 billion investment in port construction in
the period 2001–05, over 80 per cent was used to build new container ports or expand
existing ones. A container-based global hub port-city has emerged in Shanghai.

Figure 4 Container throughput in Shanghai port between 1978 and 2006
Source: SMSB, 2007

Indicator GDP GDP in secondary sector Total value of import and export

Cargo throughput 0.91 0.92 0.98

Container throughput 0.95 0.95 0.99

Table 2 Correlation coefficients between port throughput and economic indicators

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The growth of global hub port cities under globalisation 437

Now we will examine the relationship between the growth of container throughput,
the urban economy and the hinterland in the case of Shanghai. Three economic
indicators – GDP, GDP in the secondary sector, and the total value of imports and
exports – are used to represent the urban economy, manufacturing and foreign trade,
respectively. Table 2 shows their Pearson correlation coefficients in the period of
1985–2005. All correlation coefficients are highly significant at 0.05 level. The results
show clearly that the growth of Shanghai port is closely related to the development of
Shanghai’s economy, manufacturing and foreign trade.

Figure 5 shows the proportion of foreign trade in total cargo throughput. The
period 1978–2005 can be divided into two periods. Between 1978 and 1993, the share
of foreign trade in total cargo throughput was around 20 per cent, indicating that
Shanghai port mainly served the needs of domestic goods transport. In the second
period of 1994–2005, the share of foreign trade in total cargo throughput increased
rapidly. It is in this period that Shanghai emerged rapidly as a global hub port. This
change was induced by rapid expansion in international trade, especially outward
processing driven by foreign investment.

Shanghai has attracted a great deal of foreign direct investment (FDI). By 2006,
it had received a total FDI of US$66.76 billion. In 2006, foreign-funded enterprises
accounted for 40 per cent of industrial output. In addition, Hong Kong, Macao and
Taiwan-funded enterprises contributed 15.2 per cent of industrial output (SMSB,
2007). Given that a lot of FDI is engaged in outward processing and assembling by
large-scale import and export, its share in export has also increased greatly. In the
period 1991–2006, exports grew by 23.9 per cent per year, while FDI grew by 26 per
cent per year. In 2006, foreign-funded enterprises contributed 66.86 per cent of the

Figure 5 Share of foreign trade in total cargo throughput at Shanghai port between 1978 and 2005
Source: SMSB, 2007

IDPR31_4_05_Huang.indd 437 10/11/2009 12:17

Yefang Huang438

total export from Shanghai. The share of exports due to outward processing also
reached 56.15 per cent in that year (SMSB, 2007). The growing economy of Shanghai
provides great impetus to the development of the port industry.

The cargo throughput at Shanghai port comes from Shanghai and its hinterland,
the YRD. By comparing the total value of imports and exports of Shanghai port and
the total value of imports and exports by Shanghai firms, the position of Shanghai
port as a regional hub port can be revealed. These two indicators are different, as
firms in Shanghai’s hinterland may also use Shanghai port for import and export.

As shown in Table 3, Shanghai firms accounted for less than half of the total value
of imports and exports in Shanghai port in the period 1985–98. Thus Shanghai was
mainly a hinterland-serving hub port-city in that period. Shanghai firms accounted
for more than half of the total value of imports and exports in Shanghai port in
the period 1999–2005. Shanghai became mainly a city-serving hub port-city in this
period. The significant increase in exports by Shanghai firms is due to the rapid

Year 1985 1990 1992 1994 1996 1998 1999 2000 2002 2004 2005

Total imports
and exports of
Shanghai firms

5,174 7,431 9,757 15,867 22,263 31,344 38,604 54,710 72,664 160,026 186,365

Total imports
and exports in
Shanghai port

14,873 17,289 25,145 36,242 5,287 63,638 76,151 109,311 142,501 282,575 350,377

Share of Shanghai
firms (%)

34.79 42.98 38.80 43.78 42.11 49.25 50.69 50.05 50.99 56.63 53.19

Table 3 Comparison of total import and export of Shanghai firms and total import and
export in Shanghai port (US$ million)

Source: SMSB, 2007

Source 1st quarter of 2006 2005 2004 2003

Total 4,594 18,084 14,554 11,282

Trans-shipment of Yangtze River 410 1,418 1,111 798

Share (%) 8.92 7.84 7.63 7.07

Coastal trans-shipment 112 605 449 283

Share (%) 2.44 3.35 3.09 2.51

International trans-shipment 104 403 282 134

Share (%) 2.26 2.23 1.94 1.19

Table 4 Source of containers in Shanghai Port (1000 TEUs)

Source: Board of Governors of Shanghai International Port and Board of Governors of Shanghai Port Container
Company, 2006

IDPR31_4_05_Huang.indd 438 10/11/2009 12:17

The growth of global hub port cities under globalisation 439

growth of advanced manufacturing in Shanghai in the twenty-first century, making
it significantly different from Hong Kong and Singapore, which rely on hinterland
and trans-shipment respectively. In contrast to Singapore, Table 4 shows that trans-
shipment accounted for only 13.62 per cent of total containers in Shanghai port in
the first quarter of 2006.

Discussion: three models of the global hub port-city
The spatial evolution of port and city relations in both developed and developing
countries, and how the importance of ports and the shipping industry has declined in
some Western cities due to globalisation and de-industrialisation, have been outlined
earlier in the paper. In Asia, many ports continue to expand, and some have become
global hub ports according to the Asian hub port-city consolidation model (Lee et
al., 2008). The emergence of global hub ports in Asia has much to do with export-
oriented industrialisation driven by large scale foreign investment and international
trade.

Thus if cities adopt an export-oriented strategy, as Shanghai has done, inter-
national shipping centres become even more important to their development and
growth. Indeed, developing a container hub port and an international shipping centre
has become an essential urban development strategy to attract foreign investment,
promote economic development and expand international trade. Many cities in
China and Asia more widely are keen to make investments in container ports, leading
to strong competition (Shen, 2008b). With a growing manufacturing industry, finan-
cial and trade centres could then emerge in such cities. Thus for cities in developing
countries such as China, the formation of financial and trade centres will be facilitated
by a strong international shipping centre (Frankel, 1998; Wang, 1998; Sung, 1999;
Airriess, 2001a).

The Asian hub port-city consolidation model developed by Lee et al. (2008)
describes the main characteristics of hub port-cities in Asia, especially Hong Kong

Table 5 Three models of global hub port-city in Asia

Global hub port-city Port function Urban function Representative city currently

City-serving hub port-city City-serving international
shipping centre

Manufacturing base;
trading centre; financial
centre

Shanghai

Hinterland-serving hub
port-city

Hinterland-serving inter-
national shipping centre

Trading centre; financial
centre

Hong Kong

Trans-shipment hub port-city Trans-shipment inter-
national shipping centre

Singapore

IDPR31_4_05_Huang.indd 439 10/11/2009 12:17

Yefang Huang440

and Singapore. Based on the analysis of Shanghai port in previous sections, it is
clear that Shanghai’s global hub port-city model is different from Hong Kong and
Singapore’s. Indeed, three models of global hub port-city in Asia can be identified
according to the relations between ports and their hinterlands (see Table 5).

The first model is called the city-serving hub port-city. The city has a city-serving
international shipping centre. It has a strong manufacturing base with a trade-oriented
economy. Goods produced by mass production need to be exported to other areas,
and a large amount of raw materials and intermediate inputs need to be imported
to the city. Thus the international shipping centre will provide essential transporta-
tion services for cargos mainly produced by the strong manufacturing base in the
city. Cargos from the hinterland are less important than cargos from the city. In the
meantime, to deal with domestic and international trade, a trade centre and a finan-
cial centre will also emerge in the city. The city-serving international shipping centre
helps the city to become an international financial centre. At the same time, the finan-
cial and trade centres, in turn, require and also support the city to become an inter-
national shipping centre. Currently, Shanghai can be considered as a city-serving
global hub port-city. With the further expansion of trading and shipping services to
its hinterland, especially the YRD, Shanghai may move closer to the second model
in future.

The second model is the hinterland-oriented hub port-city. The city’s shipping
centre mainly serves the logistics needs of the hinterland through land and sea trans-
portation and trans-shipment. The city also acts as the trade centre for the hinter-
land. The hinterland engages in mass production, mainly for export to international
markets. Currently, Hong Kong is a typical example of the hinterland-oriented hub
port-city. It has the vast hinterland of the PRD, which has become the world’s factory.
Many commodities produced in the PRD are traded and exported via Hong Kong
(Shen, 2008a). Hong Kong acts as an international financial centre, trade centre and
shipping centre, but Hong Kong itself is not currently a major manufacturing base.
Indeed, Hong Kong was a city-serving hub port in the 1960s and 1970s when it was
a major manufacturing base and its shipping centre mainly served its own cargo.
Massive industrial relocation and cross-boundary investment in the PRD since the
1980s have changed Hong Kong’s status from a city-serving hub port-city to a hinter-
land-serving hub port-city.

The third model is a trans-shipment hub port-city. The main function of its
shipping centre is trans-shipment. In contrast to the second model, transactions are
not conducted in the city; commodities are transferred at its port to other places.
Singapore is an example. Many products produced in Southeast Asia are exported
to worldwide destinations via Singapore, but the trade is not conducted in the city.
Singapore’s financial centre status is related to other economic activities in the city. It
has a weak link with its trans-shipment services (Airriess, 1993; 2001).

IDPR31_4_05_Huang.indd 440 10/11/2009 12:17

The growth of global hub port cities under globalisation 441

The first two models show that an international financial centre will follow the
growth of an international trade centre in the city. However, the experience of urban
development in Western countries shows that the link between the international finan-
cial centre and the international shipping centre may be weakened when the urban
economy becomes more sophisticated.

New York and London, with the assistance and support of international shipping
centres, have gradually become the world’s most important international financial
and trade centres. London overtook Rotterdam to become the largest port in the
world in the late eighteenth century, while New York became the largest port in USA
in the nineteenth century (Xu, 2006). Currently, London’s Tilbury port is the third
largest port in UK and serves London together with nearby Felixstowe and South-
ampton ports. The port of Felixstowe ranked twenty-ninth in the world in 2005. New
York/New Jersey port ranked seventeenth in the world in 2005. The ports became
slightly less important as services and offshore trade largely replaced goods trade. The
current relationship between the international financial centre and the international
shipping centre is weaker. But these cities will continue to prosper because of the
‘lock-in effect’ of agglomeration economies (Fujita and Mori, 1996). These cities were
international shipping centres and trading centres before becoming more focused on
financial services.

Conclusion
Previous studies have outlined the importance of the state as a driving force in the rapid
rise of Shanghai (Zhang, 2002; Wu, 2000). Using Shanghai international shipping
centre as a case study, this article shows that the success of city and port development
in Shanghai results from both favourable market opportunities and rational urban
development strategies pursued by Shanghai government.

The article has examined the symbiotic relationship between the port and urban
economic development in Shanghai. A strong city economy has played a vital role
in the rise of this port. It is clear that the strategy of developing an international
shipping centre is based on the opportunities provided by the dramatic growth of
manufacturing and export in Shanghai and its hinterland. In Shanghai, massive FDI
has resulted in large-scale outward-processing and explosive growth in imports and
exports. Statistical analysis shows that the growth of Shanghai port is closely related
to the development of Shanghai’s economy, manufacturing and foreign trade.

While Asian port cities are different from port cities in Western countries, there are
also significant differences between Asian global hub port-cities. The Asian hub port-
city consolidation model ignores these differences (Lee et al., 2008). Three models
of global hub port-city are proposed to describe the different cases of Hong Kong,
Singapore and Shanghai. These differences are caused by different stages of urban

IDPR31_4_05_Huang.indd 441 10/11/2009 12:17

Yefang Huang442

development and different relationships between the cities and their hinterlands.
Hong Kong and Singapore are well developed cities; their ports mainly serve their
hinterlands, with limited manufacturing and cargo generated within the city. Shanghai
is an emerging world city with a significant manufacturing sector; it fits the model of
a city-serving global hub port-city. With the development of international economic,
financial, trade and shipping centres in Shanghai, the city will emphasise the devel-
opment of the tertiary sector. With more cargos from its hinterland, Shanghai may
become a hinterland-serving hub port-city similar to Hong Kong. Thus a hub port-
city can move from one type to another.

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IDPR31_4_05_Huang.indd 444 10/11/2009 12:17

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Accra’s expansion can be

characterized as a quality

residential sprawl resulting

in a unicentric urban form.

Local forces have interacted

with global forces, and

human agents have taken

advantage of what has been

provided.

Structural Adjustment and Emerging
Urban Form in Accra, Ghana
Ian E. A. Yeboah

Researchers have postulated the emergence of new urban
forms in the Third World (TW), which are characterized by
either a deconcentration of urban functions to peri-urban
or smaller cities (polycentric), or a fusion of urban and rur-
al functions (desakota). This paper provides empirical evi-
dence, in the form of the phenomenal growth of Accra, on
emerging urban forms. It argues that Accra’s growth is a
quality residential sprawl with unicentric tendencies, rath-
er than either a deconcentration of urban functions or a fu-
sion of urban and rural functions. For Accra, globalization,
economic growth, and Structural Adjustment have helped
the state provide enabling circumstances for global and lo-
cal factors to contribute to the city’s expansion. Based on
the case of Accra, the paper raises a series of questions that
relate to generalization, planning, and the management of
sub-Saharan African cities (SSACs).

Introduction

This paper is about the growth and expansion of SSACs and emerging ur-
ban forms. SSACs in this paper exclude the relatively westernized cities
of Southern Africa, such as Harare, Cape Town, and Johannesburg. The pa-
per focuses on Accra, Ghana, which has undergone remarkable areal ex-
pansion over the last fifteen years. What is emerging in Accra is a uni-
centric urban form that is characterized as a quality residential sprawl.
Accra’s expansion has coincided with Ghana’s Structural Adjustment Pro-
gram (SAP), which has led to a general growth of the nation’s economy. In a
sense, therefore, this paper explores the relationship between economic
growth and urbanization in the TW. The question is whether the relation-
ship between Accra’s growth and its SAP is real or coincidental.

The literature on TW urban form and economic growth is character-
ized by two theories of urban growth and expansion in Asia (McGee 1991)
and Latin America (Gilbert 1993). Globalization, economic growth, and
SAPs are associated with both theories. Limited research attention has
been given to SSACs. Knowledge of cities such as Accra, however, suggests

africa
T

O
D

A
Y

S
T

R
U

C
T

U
R

A
L

A
D

JU
S

T
M

E
N

T
A

N
D

E
M

E
R

G
IN

G
U

R
B

A
N

F
O

R
M

IN
A

C
C

R
A

, G
H

A
N

A

6

2

that specific urban forms are emerging in sub-Saharan Africa (SSA). The
purpose of this paper, therefore, is to situate the expansion of cities like
Accra within the framework of globalization, economic growth, and Struc-
tural Adjustment, as well as within the broad literature on urban form in
the TW. A review of TW urban form and SAP theories, in the first section,
reveals that limited research exists on SSACs. This lacuna provides the
rationale for this paper. The second section of the paper examines methods
of analysis, substantiating why Accra is a good case study. This is followed
by a third section that maps the physical expansion of pre- and post–SAP
Accra. The nature of Accra’s expansion is characterized in the fourth sec-
tion. The fifth section provides an explanation for Accra’s expansion. The
paper concludes with questions centered around planning, management,
and comparative research on globalization, Ghana’s SAP, and economic
growth.

The Literature on Third World Urban Form

TW urbanization has been influenced in the past two decades by global
economic restructuring, SAPs, economic growth, poverty alleviation pro-
grams, the effects of natural disasters and wars, and environmental degra-
dation. In terms of research, it is globalization, Structural Adjustment, and
economic growth that have had the greatest impact on the spatial as-
pects of TW cities (McGee 1991; Gilbert 1993). Research on globalization,
Structural Adjustment, and economic growth has led to the postulation
of two theories in the literature by Gilbert (1993) and McGee (1991). Gil-
bert (1993) argues that a deconcentration of urban functions to the periph-
ery of TW cities, as well as smaller urban centers, has occurred. This de-
concentration is associated with Structural Adjustment, the globalization
of economic activity, and local manifestations of these in the TW. Gilbert
believes that a process of polarization reversal has led to a slowdown in the
growth of megacities, and the expansion of both secondary cities and the
peri-urban areas of major cities of the TW. Thus, a polycentric urban form
seems to be emerging in the TW. In terms of Gilbert’s postulate, two issues
need clarification. First, is the emergence of these new urban forms univer-
sal to the TW as a whole, or to Latin America in particular? Second, is the
deconcentration out of city centers the same as polarization reversal with-
in an urban system, or are they different?

Specifically for Latin America, these two patterns of urban growth
have been recognized and explained. Villa and Rodriguez (1996) argue that
in the 1970s a common trend evident in the expansion of Latin American
megacities, such as Buenos Aires, Caracas, Lima, and Mexico City, was
that as cities expanded, their old administrative areas either did not grow
or declined in population. From the 1980s onward, however,

much of the growth is no longer within the urban perimet-
er. It has shifted to a number of towns and secondary ci-

africa
T
O
D
A
Y

IA
N

E
. A

. Y
E

B
O

A
H

6
3

ties within the wider metropolitan region but some dis-
tance from the main urban center. (Villa and Rodriguez 1996:
39)

This is what Richardson (1989) originally referred to as polarization re-
versal.

Debate exists as to the causes of polarization reversal (Gilbert 1993;
Villa and Rodriguez 1996: 27), but there is no doubt that it is associated
with economic growth and globalization. Most of the evidence in support
of Gilbert’s ideas on deconcentration and polycentric urbanization focuses
on megacities in Latin America (Morris 1978: 306; Ward 1993: 1148–9; Gil-
bert 1996a: 98–100; Riofrio 1996: 170; Rowland and Gordon 1996). Perhaps
the city which best reflects the deconcentration of economic activity to
surrounding towns, leading to a polycentric formation, is Greater Sao Pau-
lo, where in the 1980s, for example, industrial employment in the city
grew by only 3% whereas areas outside grew by 18%. This structural loca-
tion shift is also manifest in terms of profitability (Santos 1996: 228).

Many branch assembly plants are locating in industrial
towns within 200 km radius of the city of Sao Paulo such as
Sao Jose dos Campos, Piraciciba, Americana, Limeira, Rio
Claro and Campinas. . . . In other words, we are witnessing
the extension of the localization economies of existing in-
dustrial complexes from the strictly ‘urban’ to a somewhat
broader ‘regional scale.’ (Storper 1991: 61–2, quoted in Gil-
bert 1996b)

It is safe to conclude that the emergence of urban forms characterized by
deconcentration and polycentric formation are evident in Latin America,
especially on the megacity scale.

The other theory, associated with McGee (1991), argues that, in spe-
cific Asian countries such as Malaysia, there has been a fusion or merging
of urban and rural places and functions. McGee argues that population
growth, a shift from agriculture to industry and services, and improve-
ments in transportation networks have resulted in the increasing mix of
rural and urban activities in peri-urban areas of major Asian cities, such as
Hong Kong, Guanghouz, and Jakarta. McGee (1991) concludes that what is
occurring in Jakarta, for example, is the merging of rural and urban func-
tions. Thus, he coins the term desakota as a description of such urban
structural change.

There is substantial evidence to support McGee’s view that desa-
kotas are emerging in Association of South East Asian Nations (ASEAN)
countries (McGee and Greenberg 1992; Dharmpantni and Firman 1995:
297–99; Ocampo 1995; Firman 1996). Thong (1995) argues that external
forces have shaped the development of Kuala Lumpur, and that the periph-
ery of the city has grown faster than the city proper. Between 1981 and
1990, the periphery of Kuala Lumpur grew in population by 4.3%, whereas

africa
T
O
D
A
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the inner areas of the city only grew by 1.99%. Also, over one-third of all
approved industrial projects, employment opportunities, and industrial in-
vestment was on the periphery of Kuala Lumpur. For ASEAN countries,
therefore, the evidence suggests that the concept of desakota describes
the general pattern of urban form even though the specific causes and na-
ture of this concept differ from country to country. Increasingly, the litera-
ture on this region suggests that world cities and mega-urban regions have
emerged (McGee 1995; Lo and Yeung 1996).

Many of the processes associated with these emerging urban forms
in Latin America and ASEAN are present in many parts of SSA, but very
little research evidence on emerging urban forms in the region exists.
Structural Adjustment programs have increasingly linked countries such as
Ghana to the global system. Economic activity (especially the extraction
of primary products and retailing) has picked up in Ghana’s cities, and Ac-
cra, in particular, has experienced peri-urban expansion over the last twen-
ty years. Ghana’s economy is estimated to have grown by an average of
5% per annum since the late 1980s (ISSER 1995). Such expansion reveals a
number of interesting characteristics that require research attention. De-
spite developments of this nature in cities such as Accra, the literature on
the spatial expansion of cities in SSA is scanty, dated, or characterized by a
limited relationship between global economic forces, economic growth,
and emerging local spatial form.

For example, Onibokun’s (1989) characterization of the expansion of
Ibadan, Kaduna, and Enugu, although an interesting study, is based on 1985
data and does not consider the effects of recent SAPs in the region and
their effects on emerging local spatial form. Onibokun’s study, however,
relates urban expansion to service provision. Also, the recent United Na-
tions book, The Urban Challenges in Africa, edited by Rakodi (1997c), has
a set of useful chapters on individual cities alongside chapters that synthe-
size urban theoretical issues on Africa. None of the chapters specifically
addresses emerging spatial patterns in cities of the region, especially as
they relate to SAPs. Rakodi’s (1997a) and Simon’s (1997) chapters in the
volume identify the importance of globalization and SAPs to the periph-
eral status of African cities. Simon’s, in particular, examines the relation-
ship between economic growth and urbanization, and concludes that the
relationship is not a clear-cut one. Yet the spatial implications of this rela-
tionship are not addressed. The individual city case studies hardly address
emerg-ing urban spatial forms under globalization and SAPs. Dubresson’s
(1997) chapter on Abidjan gives the closest indication of the effect of eco-
nomic growth and postindependence modernization on the growth and ex-
pansion of Abidjan, but it does not look at the effect of recent SAPs on
urban spatial form. Yousry and Atta’s (1997) chapter provides only a brief
assessment of the physical growth of Cairo, from A.D. 980 to 1994. Only a
statement on the contribution of the private housing sector to Egypt’s gross
domestic product is provided (Yousry and Atta 1997: 133–5), without em-
phasizing the implications of this to urban expansion and form.

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There is no doubt that the scanty data on SSA and its cities has con-
tributed to an absence of research on emerging urban form. Yet a pletho-
ra of literature concerning the effects of SAPs on various sectors of SSA
exists on education (Cobbe 1991; Sowah 1993; Daddieh 1995), health
(McCarthy-Arnolds 1994; Thesien 1994; Logan 1995), employment and la-
bor (Herbst 1991; Muenen 1995; Fashoyin 1996), and rural development
(Mikell 1991). The few references to the relationship between SAPs and
urban form include the work of Riddell (1997), and Jeffries (1992), respec-
tively.

Adjustment programs have altered cities. From a position of
leadership in national economies and a magnet attracting peo-
ple from the countryside, the city has become the focal point
of national depression. (Riddell 1997: 1303)

There is no doubt that, for some segments of populations in African cities,
this scenario may be real. But it is only for a segment of the population,
usually the poorer segment. In fact, in the early years of the SAP in Gha-
na, Accra seemed at a standstill since most of the respondents in Jeffries’
(1992) survey expected their economic circumstances to improve in the
near future. It is difficult to determine whether this standstill was brought
on by the SAP or was a direct continuation of the economic stagnation
that had plagued the country just before SAP implementation. Increas-
ingly, though, SSACs which have undergone over a decade of SAPs have
not become the points of national depression.

With forty-two sub-Saharan African countries embarking upon SAPs,
the relationship between SAPs and urban spatial form and expansion will
increasingly become a variable in planning the delivery of jobs, housing,
services, and infrastructure in cities of the region. Thus, it is germane to
understand the nature and causes of urban spatial expansion and emerging
forms within the region. The rationale for this paper is to appreciate and
understand what is occurring to the growth and expansion of SSACs within
the context of globalization, economic growth, and implemented SAPs. It
is important to ask questions about what has been happening in sub-Sa-
haran African urban form under SAPs, why such forms are emerging, and
what these forms mean. Before dealing with the specific objectives of the
paper, though, it is imperative to explain why Ghana and Accra have been
chosen, and to explain the kinds of data, methods, and analyses used in
this paper.

Data and Methods of Analyses

Accra is not the largest or the most researched city in SSA. Estimates
are that its metropolitan population is between 2 and 2.5 million people.
As with most African capitals, it is not a major global city. Yet dramatic

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growth of the Ghanaian economy under its SAP and the remarkable expan-
sion of Accra make it a good case study. This is moreso because the SAP
has strengthened the link between Ghana and the global economic, cul-
tural, and political system. In fact, the World Bank has identified Ghana
as a success story under Structural Adjustment (Alderman 1994). There is
no doubt that the Ghanaian economy was in the doldrums prior to 1983
(Ewusi 1984; Frimpong–Ansah 1991). Since the Rawlings government in-
stituted its Economic Recovery Program (ERP), which was followed by the
SAP, the economy has grown by an estimated 5% each year (ISSER 1995).
Inflation, although still high, is nowhere near the pre–SAP levels. Relative
incomes have not increased, but, compared to the early 1980s, there is now
an abundance of consumer goods in shops and markets in the country (Nin-
sin 1991; Rothchild 1991). Perhaps the most convincing evidence of eco-
nomic growth is seen in the extent to which the middle class engages in
conspicuous consumption of automobiles, housing, cellular phones, inter-
national air travel, and other western cultural attributes. Such consump-
tion begs the question whether what has happened in Ghana constitutes
development. There is, however, no doubt that the economy has grown
because Ghana has embarked upon Structural Adjustment and, as such,
has been linked strongly to the global system of production, distribution,
and consumption. It is the nexus of local-global interaction (i.e., economic
growth and urban form) that is at the heart of this paper.

Two main approaches of measuring urban growth and city expan-
sion exist in the literature. The first examines demographic growth, eith-
er by natural increase or rural-urban migration (Preston 1988; United Na-
tions 1994). In some cases density of population within areal units (e.g.,
census tracts) also gives an indication of urban growth. There is a general
unavailability and unreliability of population data, and data on urban den-
sity in Ghana and SSA as a whole (Ohadike 1991; Rakodi 1997a; Simon
1997). The last census in Ghana was taken in 1984 (roughly coterminous
with the beginning of the SAP), and thus, comparing the pre- and post–SAP
periods, using demographic data, is impossible.

The second method measures urban areal expansion, rather than de-
mographic growth, and looks at the expansion of built-up areas of cities.
Mapping legal incorporation of land to a city, or encroachment and sprawl
(often illegal) of a city onto rural communities and green spaces, can be
used. In this vein, density of building (which can be determined by the
issuing of building permits) in areal units can give an indication of expan-
sion and growth. In the case of Accra, incorporation does not exist as a
planning tool, and most of the city’s expansion has been by encroachment
and sprawl. In discussion with local planning officials, it is evident that
most builders just ignore the requirement for permits before building, and
the administrative agencies do not have the resources for enforcement. In
fact, Ewutu Efutu Senya District (EESD) only started requiring permits for
buildings in Kasoa in 1995. In the case of Ga Rural Assembly (GRA), esti-
mates are that up to 50% of all buildings have been erected without per-

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mits. Building permits are, therefore, an unreliable yardstick for measur-
ing the areal extent of expansion of Accra.

Since demographic data is unavailable and building permits are unre-
liable, the most reliable and available alternative method to determine
Accra’s expansion is to use the areal photographs taken of Accra in 1986,
1992, and 1997, in order to map out the city’s expansion. The most recent
topographic map of Accra, produced by the Survey Department of Ghana,
was in 1975. Therefore, it is possible to map the areal expansion of Accra
in a synoptic fashion, from 1975 through 1986, 1992, and 1997. The infor-
mation on this map was confirmed by ground surveys to determine its
accuracy.

This paper, for the purposes of the pre–SAP era is considered to be
from 1975 to about 1986. The post–SAP era is from 1986 to 1997. Each pe-
riod is about eleven years. Ghana’s SAP officially started in 1986, although
the Rawlings government in 1983 had instituted similar austerity mea-
sures (Adepoju 1993). The derived map of Accra’s physical expansion does
not indicate the density of development associated with this areal expan-
sion. Because of the unreliability of building permits, the alternative is to
count, by field surveys, the number of buildings in each census tract or
new expansion of Accra. Obviously, this is impossible to do. To comple-
ment the mapping of Accra, therefore, recent research by Odame Larbi
(1994), which gives an indication of development density for parts of peri-
urban Accra, will be used to complement the map of the physical expan-
sion of Accra. It should be stressed that the derived map shows the expan-
sion of Accra, but does not give a count of the number of buildings, or
population distribution.

Another complement to the map of Accra’s expansion is a survey
which was undertaken in four of the new developments to investigate three
main questions in the literature. The first of the three questions concerns
whether the massive expansion of Accra is fueled by long-distance build-
ers, who are mostly Ghanaians resident abroad (Diko and Tipple 1991,
1992). The purpose was to find out whether or not it is Ghanaians, residing
abroad, who fueled the building boom in Accra. The second question con-
cerns the wages of Ghanaians abroad, and asks whether Western wages,
even for menial jobs, can support building of houses in Ghana (Owusu
1998). The purpose of this question was to find out whether class matters,
in both the ability to build, and the locational preference of Ghanaians re-
siding abroad. This is why it was appropriate to choose four new develop-
ments that cut across class lines. These four developments are represent-
ed by the relatively high socioeconomic class with a foreign orientation
(East Legon), the locally oriented high class (Haatso), the middle-class area
(Sakumono), and the lower-class area (Kasoa). The third question was to
designed find out if people who build in distant parts of peri-urban Accra
are connected to Accra and if they consider themselves residents of Accra.
Even though administrative boundaries give the impression that most of
the new developments are not part of Accra (Department of Town and

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Country Planning 1991), residents in these developments are strongly con-
nected to the central city. In fact, Ghanaians consider most of the expan-
sion of the city as a part of Accra. The purpose was to determine the com-
muting patterns of residents in these new developments, each of which are
located between 10 and 18 miles from central Accra, at various cardinal
locations.

Between June and July 1997, ten respondents were interviewed from
four residential developments in Accra. The criterion used in selecting re-
spondents was their willingness to be interviewed if they owned a house in
the development. On the surface, a sample of forty is not large enough.
The emphasis, however, was to have intensive, rather than extensive, in-
terviews with the respondents, and to get a sense of the strategies of people
who build in Accra. The sample size was constrained by the fact that indi-
viduals were asked to reveal their sources of finances. This is an uncom-
fortable topic for people in Ghana. Also, it would be difficult to determine
the representative sample size for a population in which building is an
ongoing process. The data collected was not used for inferences, but only
to give an exploratory description of the three questions identified. The
results of this survey should thus be seen as complementary, rather than
definitive.

What Has Happened to Accra’s Spatial Form?

Figure 1 maps the physical expansion of the built-up area of Accra for 1975,
1986, 1992, and 1997. Accra has expanded remarkably over the past twen-
ty-five years. Most of the expansion has been post–SAP, occurring in peri-
urban Accra, rather than central Accra (away from the already built-up
areas of the Accra Municipal Assembly (AMA) and Tema Municipal As-
sembly (TMA) to rural areas covered by GRA and EESD). Today, Accra
stretches for about 36 miles from east to west, and about 18 miles from
south to north. Overall, between 1975 and 1997, Accra has expanded in
area by 200.7 square miles, or by 318% over the 1975 area. This is phenom-
enal! But very little of this expansion occurred pre–SAP (i.e., between 1975
and 1986), with the greater part occurring post–SAP. Pre–SAP, the city ex-
panded in area 28.8 square miles, or by 46% over the 1975 area. Yet post–
SAP, the city expanded 171.9 square miles, or by 186% over the 1986 area.
Even in the post–SAP era, as Table 1 shows, most of the expansion has
been between 1992 and 1997 (or late post–SAP).

Pre–SAP (1975–1986), most of the expansion was on the fringe of the
1975 metropolitan boundary, in three areas: (1) around the northern part of
the motorway extension (East Legon, South Legon, North Dzorwulu, Dzor-
wulu, North Achimota, and Abeka); (2) around the western flank of the
motorway extension, where it meets the Accra-Winneba Road (Gbawe,
Malam, McCarthy Hill, and the area south of this toward Dansoman); and
(3) the area immediately surrounding Teshie and Nungua. Post–SAP ex-

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pansion was mostly in areas immediately abutting the built-up urban area
in 1986, especially northward. Early post–SAP expansion (1986–1992) has
been a filling-in of the area between Teshie, Nungua, the original motor-
way (the opening of Spintex factory and the road to it facilitated this ex-
pansion), and north of that to North Legon, Haatso, and Papao (in GRA).
Other areas of expansion during this period include Weija and Kasoa in the
east (the latter in EESD), and northern communities of Tema and Ashia-

TABLE 1: Physical (Areal) Expansion of Accra, 1975–1997

Year/Period Number Area (miles2) Increase in Percentage
of Years Area (miles2) Change

1975 62.918
1986 91.709
1992 134.182
1997 263.61

0

1975–1986 11 28.791 45.76
1986–1992 6 42.473 46.31
1992–1997 5 129.428 96.46
1986–1997 11 171.901 187.44
1975–1997 22 200.692 318.97

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man. Late post–SAP expansion (1992–1997), however, has been mostly to
the north and west of what already existed, and to a large extent, expan-
sion has generally focused on green spaces in GRA and EESD. Thus, spe-
cific transportation routes seem to have facilitated the expansion both pre-
and post–SAP but, expansion post–SAP has been a sprawl into rural areas
in all directions from the coast, compared to the pre–SAP trend which was
on land immediately abutting the built-up area of 1975.

How Has the Urban Form of Accra Changed?

The expansion of Accra is characterized by seven attributes. Based on these
seven attributes, Accra’s expansion can be characterized as a quality resi-
dential sprawl resulting in a unicentric urban form. The relationship be-
tween these seven attributes and Accra’s emerging urban form is described
in Figure 2. The first of these attributes is that Accra’s expansion has been
spontaneous and unplanned. This is similar to what Riofrio (1996) has de-
scribed for Lima, Peru. Due to the lack of planning and development con-
trols (Odame Larbi 1996), Accra’s expansion mimics the haphazardness of
a sprawl into peri-urban areas. The city has expanded by either encroach-
ing on rural settlements or into green spaces between rural settlements.
This trend is evident in the city’s expansion to Kwabenya where the Atom-

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ic Energy Commission properties and the village of Kwabenya still exist:
the expansion has occurred around these existing properties. Expansion
into both Ashongman and Adenta has followed such a pattern. In some
cases, however, green spaces not associated with rural settlements have
been encroached upon. The expansion between Teshie, Nungua and the
Accra-Tema Motorway is characterized by this pattern. Although Accra’s
expansion is largely unplanned, in a few cases, such as Pokuase Estates,
African Concrete Products planned and built its development in isolation
from the village of Pokuase.

The second attribute is that building development and population
density is low in peri-urban Accra. Low-density development has been
manifest in two ways. First, a bird’s-eye view of Accra reveals that clus-
ters of buildings dot the greenery of the countryside and the density of de-
velopment in most places is rather low. Odame Larbi (1996: 204) estimates
that less than 80% of East Legon, less than 50% of McCarthy Hill and East
Legon Extension, less than 40% of East and West Adenta, less than 30% of
North Dome and Haatso, and less than 20% of Nkwantanang have been
built up. Thus, there are still a lot of undeveloped plots in these areas. An
assessment of building density is that it decreases the further away one
moves from the coast. This indicates that the process of expansion or sprawl
is ongoing, especially since uncompleted houses are common. Low-densi-
ty development is secondly manifest in the intensity of land use for build-
ing. Even in cases where houses have been completed, these tend to be
single-family dwellings with low population densities, rather than flats or
apartments. One- and two- story houses predominate. This practice is sim-
ilar to what pertains in Lima, Peru, where there is an

unfortunate tendency toward low-density development. The
outward spread of the city has occurred in an uncontrolled
and highly irresponsible manner. (Riofrio 1996: 170)

In Accra, the building materials used, the way in which buildings are erect-
ed, low land values, and uniquely Ghanaian cultural traits account for this.
Since most buildings in Ghana are of cement blocks, concrete, and mor-
tar, providing a flow on top of a first floor for a second and subsequent
third level is rather expensive. In the light of low land values (discussed
later), most builders have resorted to just a few stories. Despite the pre-
ponderance of low-density buildings, in the past fifteen years, there has
been a move toward buildings with more than four stories. For example,
the Social Security and National Insurance Trust (SSNIT) Flats of Danso-
man, the REDCO Flats of Madina, Adenta Flats, and Sakumono Flats along
the Beach Road to Tema have four or more stories. However, a cultural
trait, the pounding of fufu (a common meal in Ghana), seems to limit the
popularity of multistory buildings in Ghana. Kaiser and Italian Flats, built
in Tema in the 1960s (all four stories high), are structurally weak because
of the pounding of fufu on higher floors.

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The third attribute of the city’s expansion is that, for the most part,
buildings are still designed and built incrementally, by individuals and not
by development companies (Diko and Tipple 1992). Until recently, people
who wished to build a house did not depend on developers. Usually, an
individual who is ready to build acquires land, subcontracts parts of the
job to masons, carpenters, plumbers, roofers, electricians, while the owner
or his or her representative manages the project by him or herself. No sin-
gle contractor is put in charge of managing the whole project. If finances
get depleted, the individual can suspend the project and continue when-
ever he or she wishes (Diko and Tipple 1991). The individual might em-
ploy watchpeople (usually poor relatives) to stay in the uncompleted prop-
erty, or may even move in, complete a number of rooms, and continue to
build incrementally. Thus, a system of relying upon pieceworkers, similar
to that described for Abidjan by Dubresson (1997: 275), is utilized. This
building practice has implications for the completion time schedule of
building and quality control. Most residential units built in this way often
take years, rather than months, to complete. Partly because of the time-
table, authorities who issue building permits rarely inspect to acertain if
the building is to specifications. A three-bedroom house which has been
granted a permit may consequently be completed as a five-bedroom house
five years later.

Rakodi (1997b: 392) suggests that incremental building is often due
to a lack of finance and an underdeveloped mortgage market. In Accra, this
is the case since most housing construction occurs in the private sector
without the establishment of mortgages (individual or institutional). This
trend is similar to what pertains in Lagos (Abiodun 1997: 217). It is also
similar to Cairo where, in 1991, 97% of investment in housing and 95% of
the total value added to the housing sector came from the private sector,
rather than from mortgage companies (Yousry and Attah 1997: 134). Since
1990, however, a number of private development companies have entered
Ghana’s building market. Development companies are popular, especial-
ly for Ghanaians residing abroad who wish to build. The largest of them,
Regimanuel-Gray, had built about 800 houses in Accra as of mid-1997.
The full impact of development companies on housing has, however, not
been great since the majority of Ghanaians still self-build.

The fourth attribute of Accra’s expansion is that most buildings have
been started in anticipation of infrastructure and services like roads, drains,
electricity, water, and telephone service. Yousry and Attah (1997) have de-
scribed a similar situation for Cairo, where development companies have
relied upon patronage and the bribery of state officials to get services into
new developments (El Kadi 1988). When Dome (in Accra) first began to de-
velop about twenty-five years ago, there were limited services. Through
time, most services have been provided, and the citizens of Dome have
pooled resources to provide other infrastructure, such as drains. The aver-
age Ghanaian who wishes to build in Accra, therefore, anticipates that
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even if it takes ten years. As in Cairo, patronage plays a role in when and
how these services are provided. With the emergence of development com-
panies in the housing industry, however, this trend, of building in antici-
pation of services and infrastructure, may change. For example, Pokuase
African Concrete Products (ACP) built roads, connected electricity to the
site, laid a pipeline to the waterworks at Kpong to service the area, and
built estate houses for sale. This is a new trend in Accra, even though it is
similar to the way in which Tema Development Corporation (TDC) built
Tema in the 1960s.

The fifth attribute of Accra’s expansion is that, even though most
buildings in the peri-urban area are built in anticipation of service, they
are of high quality, and are often owned by the relatively wealthy, not the
poorer majority. Usually, wealthy family members build and make provi-
sion for poorer relatives to stay with them, or even to act as caretakers in
their absence. As will be discussed later, the extended family has been an
important consideration in building in Accra. What is emerging in Accra
is, therefore, nothing like the low-quality or irregular housing units that
the poor have developed at, and beyond, the fringe of some urban places in
SSA (Stren and White 1989). Buildings in peri-urban Accra are usually built
of cement blocks with modern building materials, and are designed as self-
contained units, referred to as villas by Diko and Tipple (1992). This is not
to say that all buildings in Accra’s peri-urban expansion are mansions.
There is a range, from a few rooms to mansions. The common characteris-
tic is that they are all built well.

The sixth attribute of Accra’s expansion is that most of the building
activity is intended for residential purposes. There is very little industrial
and office building construction. Even in Accra central, there are only a
few cases of office development (such as Cedi House, Opeibea House, Gold
House, and SSNIT House). Usually office buildings are associated with
banks and foreign corporations operating in the country. Also, most recent
commercial developments in peri-urban Accra are concentrated along
major roads. Generally, low-level services and production activities, such
as chop bars (local fast-food outlets), corner stores (kiosks), cement block
manufacturers, and building material retailers are the norm along major
roads. Often such economic activities only further the expansion of peri-
urban areas. Because of the importance of petty retail in the national econ-
omy (Yeboah and Waters 1997), many extensions to already existing build-
ings have been made for commercial purposes.

A trend in Ghana in the past few years has been the conversion of
lower floors of residential buildings into stores for retail. In terms of the
expansion of Accra, this trend is common along major roads within Accra
central rather than in the peri-urban area. A good example of this conver-
sion of residential to commercial, and the increasing investment in new
commercial building, is along the Accra-Nsawam Road between Achimota
Village and Mile-Seven. Most of the stores along this road sell building
materials like cement, plywood, and iron rods. A similar pattern can be

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seen between Haatso/Madina Junction and Ashalebotwe Junction on the
Accra-Aburi Road. Overall, though, investment in the built environment
has been for residential purposes, and, for the most part, has benefited the
middle class. This is similar to the benefits that the middle class has ac-
quired in Abidjan since the state opened up the delivery of land and the
provision of houses to the private sector (Dubresson 1997: 218).

The seventh and final attribute of Accra’s expansion is that there
is functional interaction between the peri-urban area and central Accra.
Thus, a unicentric urban form similar to Lima, Peru, has emerged. Riofrio
(1996: 170) suggests that many people travel through the central areas of
Lima on a daily basis to get from place to place. For Accra, strong trans-
portation and functional connections characterize these linkages. Usually,
small commercial vans, known as tro-tros and taxis, connect places like
Ashongman and Ashalebotwe to Dome and Madina, respectively. From
Dome and Madina, other parts of Accra can be accessed easily. What has
happened is that most of the expanded areas have had footpaths turned
into passageways for trucks that deliver sand, stone, and other building
materials during construction. Such pathways have been developed into
feeder roads that have subsequently been connected to main roads in Ac-
cra. It is, therefore, easy to get from central Accra to these peri-urban
areas and vice versa. Thus, a very strong functional relationship of depen-
dence exists between the areas of peri-urban expansion and central Accra
in terms of shopping patterns, commuting, and the availability of tro-tros
and taxis to residents. Even though small shopping strips and local mar-
kets may have developed in peri-urban areas like Madina and Dome, most
families do their major shopping, for both local foodstuffs and manufac-
tured goods, in Accra central or the area around Makola market. Also, the
commuting of peri-urban residents is directed toward the central part of
Accra. Of the thirty respondents from East Legon, Haatso, and Sakumono,
twenty-five were employed, only four worked (as a baker, a petty retailer, a
hairdresser, and a carpenter) in the peri-urban area where they live. Two
worked as block manufacturers in other peri-urban areas where they did
not live. The majority (nineteen) worked in central Accra. For most, their
journeys-to-work took over thirty minutes. There is, therefore, a direct
dependence of residents in the peri-urban areas on Accra central for shop-
ping and jobs.

Why Has the Urban Form of Accra Changed?

It is argued here that the expansion of Accra and the specific ways in which
it has happened reflect the interaction of global and local forces. Ghana’s
SAP has led to a growth of the country’s economy since 1983. Despite the
uncertain nature of the link between economic growth and urban growth
(Simon 1997), it should be stressed that the SAP has only allowed the state
to facilitate and enable, not cause, Accra’s expansion. Local forces have
interacted with these global forces, and human agents have taken advan-

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tage of what has been provided. Figure 3 summarizes the ways in which
local and global forces have interacted to produce Accra’s expansion. The
majority of the local forces predate SAP institution and its attendant eco-
nomic growth, but their effects have been manifest by enabling circum-
stances provided through Structural Adjustment and globalization.

Two specific global forces have emerged from Ghana’s SAP. These
are trade and investment liberalization, and foreign currency liberaliza-
tion. It is the state that instituted these forces under pressure from the
International Monetary Fund (IMF) and the World Bank. These forces have
interacted with local forces to contribute toward Accra’s expansion. Lo-
cal forces include demand, supply, as well as cultural and institutional
forces. On the demand side, factors include high inflation (which has made
real estate a safe investment) and an increased demand for houses. Sup-
ply factors include pressures on the supply of housing along with innova-
tions in that industry. Ghanaian cultural imperatives related to land ten-
ure and the desire to own a house are also important. These have inter-
acted with institutional factors to bring about the unicentric urban form of
Accra. Accra’s expansion has also occurred within the context of a stable,
although not necessarily democratic, political regime in Ghana since 1981,
and it is within this stability that the state has provided conditions that
favor economic growth, and thus, Accra’s expansion. As to whether Accra’s
expansion would have occurred irrespective of Ghana’s SAP and globaliza-

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tion is a question of debate that may be moot today. But, as Table 1 reveals,
the physical expansion of Accra underway pre–SAP (1975–1986) was mod-
est, at best. The fact that the city’s phenomenal expansion has taken place
post–SAP, especially during late post–SAP, suggests that the relationship
between the SAP and urban growth is not incidental.

Global Economic Forces

Even though it has been argued that SAPs in general, and Ghana’s program
in particular, have a rural rather than urban bias (Herbst 1991; Riddell
1997), two factors have increasingly connected Ghana to the global econo-
my, contributed to economic growth in the country, and to Accra’s expan-
sion. Trade liberalization has resulted in two trends that have affected the
growth of Accra. First, it has led to an increase in the number of vehicles
imported into the country, especially secondhand vehicles that have ex-
panded the passenger transport base of tro-tros, taxis, and buses. These ve-
hicles are often so old that they have been nicknamed Eurocarcas. As Table
2 shows, since Structural Adjustment was initiated, an increased number
of vehicles has been registered in Ghana. Individual importers, who some-
times live outside Ghana and only bring in a few vehicles at a time, have
imported most of these vehicles. Because of the increased number of ve-
hicles in the country, accessibility to all parts of Ghana, especially peri-
urban parts of Accra, has increased. Routes which were unattractive to
private transport owners, because of poor roads, are now being plied since
competition exists on all routes.

TABLE 2: Number of Vehicles Registered and Cement Production (000 Tonnes)
in Ghana by Year

Year 1982 1983 1984 1985 1986 1987

Vehicles 11,448 9,264 8,224 11,599 11,876 14,881
Cement 235 356 219 294.4

Year 1988 1989 1990 1991 1992 1993

Vehicles 21,499 20,222 20,624 15,125 15,262 19,674
Cement 412.1 560.7 618.8 713.7 1,023.9 1,192.5

Year 1994 1995 1996

Vehicles
Cement 1,298 1,544 1,548

Extracted from Quarterly Digest of Statistics, June, 1990 (Tables 11 & 22); December, 1996
(Table 12 & 25)

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The second trend is that trade liberalization under Structural Adjust-
ment has also made it possible for a variety of building materials to be
imported into the country. Mostly, these building materials are brought in
by petty importers (who often live in Ghana) rather than established cor-
porations. Most of these importers travel to Italy, the Netherlands, and
other European countries to bring in new (but sometimes used) building
materials, such as floor tiles, kitchen and toilet tiles, water closets, sinks,
and electrical fixtures. No official record of such imports is kept, but the
manufacture of cement in Ghana serves as a substitute for the increasing
importance of the building materials imports. Clinker, for cement manu-
facture, is imported into the country. Table 2 also shows that since 1984
(post–SAP), there has been a steady increase in the production of cement
whereas the production of other basic needs, such as petroleum products,
has remained relatively constant. The increasing production of cement
mirrors the importance of other building materials imported into the coun-
try by petty importers.

Anecdotal evidence of the extent of the importation of building ma-
terials is revealed by the increased number of retailers who specialize in
the sale of these imports. In Accra, shops that deal in imported building
materials dominate Kantamanto, and the Achimota to Mile-Seven retail
strip. In Kumasi, even though such retailers historically have dominated
Syrian Bungalow, the influx of new building materials is noticeable. Im-
ports of both vehicles and building materials illustrate human responses to
externally generated government policy. For both automobiles and build-
ing materials, all the importers have to do to bring their goods into the
country legally is to pay their duty to Ghana Customs. So long as no haz-
ardous materials are brought into the country, quality is not controlled.
This is the case for most goods imported into Ghana.

Apart from trade liberalization, the SAP is associated with a foreign
exchange liberalization that has made it easier for individual Ghanaians,
either living abroad or traveling outside the country, to remit their earn-
ings home. Historically, Ghanaians have migrated abroad as a survival stra-
tegy to the economic malaise that had plagued the country since inde-
pendence (Ewusi 1984; Pellow and Chazen 1984; Diko and Tipple 1992;
Yeboah and Waters 1997). According to census data, there were 20,889 le-
gal immigrants of Ghanaian origin in the United States in 1990 (Lapham
1990), and 11,079 in Canada (Owusu 1998). These immigrant communi-
ties have high numbers of illegal members who are not represented in of-
ficial statistics. Remittances sent home by Ghanaians have been made pos-
sible by the establishment of Forex Bureaus under Structural Adjustment.
Since 1984, there is nothing illegal about owning and exchanging for-
eign currency (such as US dollars, British Pound Sterling, German Marks,
Dutch Guilders, and French and CFA Francs) for Ghanaian Cedis in Ghana.
Prior to 1984, this was illegal. The Minister of Finance and Economic Plan-
ning informed Parliament that the equivalent of US $263 million was re-
patriated to Ghana in the 1995 fiscal year, and, in 1996, US $276 million

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was repatriated through the Forex Bureaus (Daily Graphic 1998). It is true
that some of these remittances are used for other extended family needs,
such as paying school fees and organizing funerals. But the importance
of investment of these remittances in housing should not be discounted.
Thus, Forex Bureaus are an example of how the state has provided ena-
bling circumstances for Accra’s expansion.

The effects of foreign currency liberalization under Ghana’s SAP are
somewhat similar to the effects of the economic liberalization of 1973, in-
fusing Middle Eastern remittances into Abidjan’s built environment (Du-
bersson 1997). The remittance literature suggests that substantial funds
flow from foreign countries into the built environment of the TW and
SSACs (Armstrong and McGee 1985; Apraku 1991; Russell et al. 1991;
Adepoju 1997). The remittance of foreign currency into Ghana is not new
(Diko and Tipple 1991, 1992), but the risky reliance on international petty
traders and other people’s bank accounts abroad as described by Diko and
Tipple are no longer popular since liberalization of foreign exchange.

The extent to which foreign exchange liberalization has contribut-
ed to the expansion of Accra is revealed by the ingenuity of Parakou Es-
tates, a major player in the expansion of Accra. Parakou’s clients in the
United Kingdom paid for houses in Ghana into its bank account in Lon-
don. According to the Managing Director of Parakou Estates, this capital
(foreign exchange) was then transferred to Ghana (Mattouk 1997). Also,
Regimanuel-Gray’s Managing Director intimated that the firm, the lead-
ing Ghanaian developer, has teamed up with a group of Americans (Gray)
who have infused a substantial amount of US dollars into the company
(Ohrt 1997). Thus, in mostly indirect ways, foreign exchange liberalization
has increased the flow of cash (capital) for building in Ghana. This is de-
spite the fact that foreign direct investment (FDI) has generally ignored
SSA (Hirst and Thompson 1995).

The inflow of indirect foreign currency by individual Ghanaians
living abroad, rather than organized FDI, has resulted from the SAP, but
why has this specifically affected the built environment of Accra? Why not
Kumasi, Cape Coast, Takoradi, Tamale, or Ho? And why has it gone into
housing and not manufacturing? Obviously, Accra’s dominance and pri-
macy is a contributory factor (Abloh 1967; Simon 1992), but this is only
part of the reason. More importantly, local economic circumstances have
influenced the actions of individuals to invest in housing in Accra. These
local conditions that have affected the country’s building boom predat-
ed the SAP and are present on both the demand and supply sides of the
housing industry. The Structural Adjustment Program has provided the
enabling circumstances for these local factors to manifest themselves.

Factors on the Demand-side

On the demand-side, a whole host of factors have contributed toward Ac-
cra’s expansion. These include the weak economy, the fact that housing is
seen as a safe form of investment, the demand for housing for the expanded

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middle class and expatriates, and the increasing dominance and primacy of
Accra in Ghana’s urban system. An attribute of the Ghanaian economy
since independence is high rates of inflation. End-of-the-year inflation rates
for 1992 were 13.3%. Those for 1993 and 1994 were 27.7%, and 34.2%,
respectively (ISSER 1995: 4). Increasingly high inflation, in light of fledg-
ling capital and money markets, has made real estate the surest and safest
form of investment. Dickerman (1988), and Diko and Tipple (1992), have
identified housing as a safe form of investment in Ghana. This has particu-
larly been the case with a dollarization of the economy in the last fifteen
years. Even government institutions, such as SSNIT, which deals with pen-
sions of Ghanaians, have realized the extent to which real estate is the
safest investment in Ghana. SSNIT has invested large sums of pension
money in real estate. Individuals have also realized the safety of real estate
as an investment option, and houses primarily are built not necessarily for
their immediate use-value, but for rental purposes and are only sold under
extreme hardship.

In addition, the importance of real estate as a form of investment in
Ghana has been enhanced by the SAP, which has brought a large number of
expatriates, who demand housing, to Ghana. Most expatriates work for
either international agencies, such as the World Bank and IMF, or for non-
governmental organizations (NGOs). Because of the dominance of Accra
in Ghana’s urban system, most of these expatriates are stationed in Accra.
They tend to rent, rather than buy, houses. Houses are rented on behalf of
expatriates by the establishment they work for, and often rent is paid in
foreign currency rather than local Cedis. Also, an advance payment of up
to three years’ rent is often expected when such houses are rented out.
Such advance payments may exceed US $30,000 and often serve as the
seed money for building another house. The payment of foreign currency
for rent, especially long-term advance payments, has also contributed to
the high quality of building. Even though Malpezzi and Tipple (1990) sug-
gest that rent control had reduced the profit motive for building houses
in Ghana in the 1980s, profit seems to be an important consideration to-
day. Ghanaians have seen the expatriate community as a potential market
for earning foreign currency in Accra. Accra’s expansion is, therefore, due
partly to the demand for houses by expatriates.

Expatriates have not been the only ones fueling the market for hous-
ing in Accra. The SAP has been good to some Ghanaians in terms of their
life chances. Contrary to Kraus’ (1991: 37) view that the standard of liv-
ing for Ghanaians under the SAP is exceptionally low relative to the late
1960s, there has been an improvement in quality of life for some residents
of Accra. An expanding Ghanaian middle class of technocrats and busi-
ness people has emerged since Structural Adjustment. Although no statis-
tical data exist as to the expansion of the middle class, anecdotal evidence
supports such an assertion. A cursory look at the streets of Accra reveals
the increase in expensive new vehicles, such as the Toyota Land Cruiser,
in comparison with mere moderately priced secondhand ones, such as the
Opel Ascona.

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The expanding middle class is in two forms. The first taxes the form
of people who are relatively well educated (especially recent university
graduates, educated either in Ghana or abroad, in the professions and tech-
nical fields), and who are employed by both public and private (either lo-
cal or foreign owned) establishments that are geared toward profit. Even
though incomes of this segment of the middle class are low, compared to
the middle class in the West, the benefits of their employment usually
include the provision of housing. Most of this middle class is housed in
new flats, like those at Sakumono, SSNIT Flats, and Adenta Flats. In Sa-
kumono Flats on the outskirts of Tema, for example, five of the ten re-
spondents interviewed have either been assigned flats by their employers
or have mortgaged their flats with the Home Finance Company (HFC), of-
ten with support from their employer. The second part of the expanding
middle class is made up of business people, such as the petty importers
who carried foreign currency from abroad to Ghana (Diko and Tipple 1991,
1992: 291). Kraus (1991: 37) is partly right in his assertion that under Rawl-
ings’ SAP a capitalist class of accumulators has not developed. What has
emerged instead is a petty retail and importer class. This group has been
able to invest in the built environment of Accra for both rental and per-
sonal use.

Pressures on Housing Supply and Innovations in Housing Industry

Even though the pressure exerted on good quality housing by expatriates
and the expanding middle class has been great, a dire shortage of houses
in Ghana, especially in Accra, predated this trend and has resulted in
the emergence of two innovations on the supply-side of Ghana’s housing
industry. These are the concept of Residential Development Companies
(RDCs) and the establishment of the HFC. These two innovations are ex-
amples of how the state has provided conditions that favor building in
Accra, and how individuals have taken advantage of investment opportu-
nities. The government’s estimates of housing shortage in the country are
dramatic. In 1990, an estimated 27,460 houses needed to be built for 1995.
An extra 200,000 units would be needed by the year 2010 (Housing and
Urban Development Associates 1990). These estimates are based on Unit-
ed Nations standards of 2.5 persons per room and 6 rooms per house. Ac-
cra is characterized by a low homeownership rate of only 25% (UNCHS/
World Bank 1993). It is mostly villas that are in short supply (Diko and
Tipple 1992: 288). Despite the dire need for houses in Accra, the neoliberal
ideology behind ERP/SAP has meant that the state has stopped building
houses to sell to the public, as it did in the past. In fact, the State Housing
Corporation and State Construction Corporation, which built housing es-
tates in the past, have significantly reduced their building activities. Em-
phasis on institutional housing provision has shifted to private individual
builders, who see the opportunity for profit and have become leaders in
meeting the supply for houses in Accra.

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In the last seven years, a plethora of development companies have
been registered in Ghana as builders. This is a case of human agency at
work in the face of profit. Examples of these are Regimanuel-Gray, Afri-
can Concrete Products, Parakou Estates, Bonsu Brothers, Raabshold Com-
pany Limited, NTHC Properties Limited, Jogis Limited, Manet Housing
Limited, and Central Services Company Limited. Most of these compa-
nies are Ghanaian owned. Even state agencies involved in housing pro-
vision (e.g., SSNIT, Tema Development Company, and State Housing
Corporation) have reorganized to work in the private sector. All these es-
tablishments (be they Ghanaian, foreign owned, private, or parastatal) fall
under an association called the Ghana Real Estate Developers Associa-
tion (GREDA).

Today, the majority of houses in Ghana are still built by individuals,
but private development companies have replaced the state as a major pro-
vider of houses. To a certain extent, development companies target Ghana-
ians residing abroad. ACP estimates that 90% of its clients are Ghanaians
living abroad, and Regimanuel-Gray estimates about 50%. The efforts of
these companies are still complementary to the private individual builder,
but, because of the housing shortage in Accra and the state’s desire to solve
that problem (despite its neoliberal ideology), both the private individual
builder and development companies have been encouraged to build in peri-
urban areas.

To facilitate the role of developers in Ghana, the state has taken steps
to eradicate a major financial bottleneck in housing construction in Ghana.
In 1993, the state set up the HFC to provide medium-term mortgages of
ten years, at 12.5% interest. Building societies existed in Ghana in the
1970s and 1980s, but their impact on housing was limited, and they oper-
ated more like commercial banks. Strictly speaking, HFC is not a state
organization. It is a nonbank financial institution licensed under the Fi-
nancial Institutions Law (PNDC Law 328) as a mortgage finance company.
Its original shareholders are the Government of Ghana, SSNIT, and Mer-
chant Bank GH. SSNIT and the IDA of the World Bank provided the first
funds for HFC (HFC 1995). Since 1995, HFC has been listed on the Ghana
Stock Exchange, and, in 1996, HFC issued a £2,000,000 Housing Bond in
the UK to raise additional capital for mortgages in Ghana. Between 1992
and 1996, HFC had disbursed about 2,807 loans for purchasing or build-
ing homes in Ghana. Most of HFC’s loans (about 95%) are in Accra (Nutsu-
gah 1997). The emergence of development companies and the establish-
ment of HFC have helped relieve some of the pressure on the state, and
have contributed toward the expansion of Accra to the peri-urban area.

Cultural Considerations

Perhaps cultural factors are the most important driving force behind the
expansion of Accra. Two aspects of Ghanaian culture have contributed to-
ward the physical expansion of Accra. The first is the desire and aspiration

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of the average individual Ghanaian to build and own a house (Diko and
Tipple 1991), and the pressures that extended families exert on up-and-
coming members to invest in housing. For Ghanaian immigrants in To-
ronto, for example, the result of such pressure is that they will not to buy a
house in Canada until they have built one in Ghana (Owusu 1998). In fact,
a new development in Kumasi has been nicknamed Canada after the im-
migrants who build there. The second aspect of Ghanaian culture is the
land tenure system, and its effects on the acquisition and delivery of land
for building in Accra and other parts of Ghana. The land tenure system has
institutional ramifications as well, and as such will be discussed below in
the institutional factors sections.

In the United States, for example, “the American dream” is associat-
ed with home ownership. This association seems to be just as Ghanaian as
it is American. This is more so in the face of an economy that is character-
ized by high inflation and low returns on other forms of investment. Apart
from its investment value, discussed above, individual house ownership in
Ghana is also seen as a measure of one’s socioeconomic status (Malpezzi
and Tipple 1990; Diko and Tipple 1992: 288). Historically, the Kwahu (who
dominate the retail sector in Accra) were prominent in building in Accra
where land has traditionally belonged to the Ga. Increasingly, this trend of
nongas building has continued but the Kwahu no longer seem to be the
only group involved in the new expansion of the city. Three types of indi-
viduals, irrespective of ethnicity, seem to be the main builders in today’s
Accra. Socioeconomic class, rather than ethnicity, seems to differentiate
today’s types of builders. What unites them is a cultural value expressed
through building in Ghana.

First, professionals and well-educated Ghanaians (e.g., physicians,
professors, and engineers), who have acquired foreign exchange by work-
ing in countries such as the USA, Canada, Britain, Germany, South Africa,
and Saudi Arabia, have contributed to the city’s expansion. This group con-
centrates in relatively high-income residential areas, such as East Legon.
Seven of the ten respondents in East Legon have lived abroad before, and
six of them have university or professional degrees. Second, Ghanaians
who are relatively less educated but who have also acquired foreign ex-
change in the West and in other African countries, doing menial jobs (what
is termed “hustling abroad”), have also contributed to the city’s expan-
sion. This group concentrates in areas such as Kasoa. Nine of the ten re-
spondents from Kasoa work in nonprofessional occupations, and four of
them have lived abroad before. The difference in the location preference
of these two groups is the cost of land, which is a reflection of differences
in levels of service and infrastructure development. Both groups, howev-
er, contribute toward an injection of foreign exchange into the Ghanai-
an economy, and a large part of this finds its way into residential build-
ings in Accra. Thus, unlike Diko and Tipple’s (1991, 1992) long-distance
house builders, who worked at menial jobs in London, today’s long-dis-
tance builders and owners include well-employed Ghanaians in other de-
veloped and medium-income countries.

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The third group and majority of builders in Accra consists of peo-
ple who have been residing in Ghana their entire lives, and usually have
worked in business, as civil servants, teachers, public servants, and mid-
dle- to high-level professionals for over fifteen years. Over time, members
of this group have acquired title to land and have gradually built a house or
are in the process of building one. Of the forty people surveyed, eighteen
had never lived abroad before, so it is safe to suggest that both Ghanaians
who have lived and those who have not lived abroad have contributed to
Accra’s building boom. Contrary to Korboe’s (1994) view that Ghanaians
wish to retire to their villages, building in Accra gives this third group the
opportunity to retire in the city rather than return to their village. This
third group of builders concentrates in areas such as Haatso, where six out
of the ten respondents had never lived outside Ghana. Thus, the general
cultural pressure of owning a house in the city has contributed to the ex-
pansion of Accra.

Institutional Factors and Conflicts

Simon (1992) identifies a triple system of land tenure in most African capi-
tals. With the exception of a limited amount of state land, families and
stools (traditional political authorities, such as chiefs) hold the majority of
land in Accra (Odame Larbi 1994). The land tenure system in Accra has
contributed in two ways toward the expansion of Accra. First, because
stools and families determine who has access to land, peripheral land in
Accra has increasingly been subdivided without the provision of service
and infrastructure. Both Asiama (1989) and Acquaye (1989) recognize that
unserviced land in central parts of Ghanaian cities lowers land values. As
in Abidjan (Dubersson 1997), elements of middlemen involved in specula-
tion have emerged in peri-urban Accra. In addition, many stools and fami-
lies bear claim to the same land. This results in litigation that further
keeps the price of land in peri-urban Accra low. Hence, cheap land in peri-
urban Accra has encouraged residential building.

Second, strictly speaking, land in Accra cannot be sold because it is
stool or family land. Yet, the various families and stools can grant rights in
the form of a lease (often ninety-nine years in length) to any person who
approaches the stool or the family with the customary drinks and pay-
ments. However, the registration, planning, and subdivision of land in the
city is the responsibility of state agencies like the Lands Commission and
the Town and Country Planning Department. In effect, there is conflict
between owners of land and agencies of the state charged with regulating,
planning, and managing land. Landowners (stools and families) can plan
the layout for a subdivision and grant leases to individual buyers, who in
turn begin development of property, even before the state agencies approve
or disapprove plans and layouts. Odame Larbi (1996) demonstrates how
the layout for Dzorwulu, a high-income residential area in Accra, reveals
major discrepancies between what the landowners submitted and what the

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Town and Country Planning Department finally approved. By the time of
approval, some houses were located in the middle of streets! As Odame
Larbi argues, there is definitely an enforcement problem in which land
delivery is fragmented. The situation is more than just enforcement. It is
rather one of two unsynchronized institutions, one traditional and the oth-
er imposed by the modern state, both acting in separate spheres and within
a limited and outdated framework for planning (Town and Country Plan-
ning Act 1945). It is therefore not surprising that, in some cases, local au-
thorities who are supposed to grant development or building permits
have no idea of what is going on in their jurisdiction. In the light of conflict
between the land tenure system and planning agencies, would-be builders
in Accra have taken advantage of such laxity in planning, low land prices,
and developed properties in the peri-urban parts of city.

Conclusion

It is evident that global and local forces have interacted to produce the
unicentric urban form emerging in Accra, and that the growth of Ghana’s
economy under Structural Adjustment, as part of the globalizing process
that Ghana is experiencing, is closely linked to the physical expansion of
Accra. Accra’s phenomenal expansion, however, raises four sets of ques-
tions. The first set of questions relates to the generality of this study. In
terms of both spatial manifestations and the underlying processes, Accra’s
expansion bears some similarities to other cities in SSA and even the TW.
The question is whether Accra is typical of SSACs. Comparative research
on other SSACs is recommended. Such research should be related to the
politico-economic circumstances of each city and country, and the socio-
cultural dynamics of their societies.

The second set of questions relates to the overall effects of globaliza-
tion and Structural Adjustment on African societies as a whole. There is
debate in the literature as to the effects of globalization of the TW (Hirst
and Thompson 1996; Simon 1997; Klak 1998). There is also debate on the
effects of SAPs on African societies. Globalization and SAPs seem to have
had negative effects on education, healthcare, and rural development in
SSA. Even in terms of urban form, there is a negative effect on the poor,
who are the majority in SSACs. Yet, no real effort has been made to tally
the positive and negative effects of SAPs and globalization on SSA. There
is a need to integrate research on the effects of these two dominant forces
on African societies, rather than an atomization of sectoral effects.

The third set of questions relates specifically to planning of Accra’s
expansion. Is it desirable for the city’s growth to continue the way it has in
the past, or is there a need to change the nature and structure of its growth?
If the decision is made to limit its growth, some of the specific questions
to address relate to what sorts of planning measures will check this growth.
What does the massive growth of Accra mean to the Ghanaian urban sys-
tem? Will this affect urban primacy, urban bias, and rural-urban, as well

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as urban-urban, migration? What policies can be implemented to reverse
some of the urban primacy of Accra, if that is desired? Since Accra has ex-
panded into four administrative jurisdictions (two urban and two rural),
with different institutional capacities and procedures of planning, how does
planning proceed? How will the conflict between planning agencies and
the traditional land tenure system be mediated? Planners should begin to
address these issues.

The fourth and final set of questions relates to the management and
livability of the city in terms of infrastructure and service provision. Is the
present unicentric form the desired one for Accra? Accra is a very difficult
city in which to get around (Quaye and Badoe 1994). Partly because of the
expansion of the city, traffic congestion is so endemic in certain parts of
the city that most taxi and tro-tro drivers avoid those parts at certain times
of the day. How can transportation be improved and planned for? What
policies can influence employment location into peripheral parts of the
city? Since most of the expansion of the city is done in anticipation of ser-
vice and infrastructure provision, how do we provide reliable, rather than
erratic water, electricity, roads, garbage collection, and telephones for the
quality residential sprawl? Do we rely on centralized private agencies, as
has been done in Abidjan (Dubresson 1997), or do we rely on local govern-
ment agencies? Can the various administrative jurisdictions involved be
coordinated to provide such services? City managers and politicians should
begin addressing these questions.

ACKNOWLEDGEMENTS

The research for this paper was supported by a Philip and Elaine Hampton Grant, a Grant to

Promote Research, and a Summer Research Grant, all from Miami University. I wish to thank

Isaac Andoh-Kesson of the Survey Department, Accra, Ghana, Ralph Sutherland of African

Concrete Products, Gaby Mattouk of Parakou Estates, William Ohrt of Regimanuel Gray, Ed-

die Nutsugah of HFC, and the forty residents of peri-urban Accra for granting interviews.

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Based on the readings titled ‘Lost Trust’, ‘Chinese Port Cities’ and ‘Emerging Urban Form of Accra’, identify and describe emerging URBAN spatial patterns in the United States, Shanghai (China) and Accra (Ghana) under globalization.

 

Instructions. This is a 3-2-paragraph essay and should fit onto one page, 1.5 spacing and 1-inch margins (About 400 words).

 

Your second paragraph should identify and describe the emerging spatial patterns for the core (USA). This paragraph should be about 100 words.

 

Your second third paragraph should identify and describe the spatial patterns for the semi-periphery (China). This paragraph should be about 100 words.

 

Your fourth paragraph should make spatial patterns for the periphery (Ghana). This paragraph should be about 100 words.

 

Your first paragraph should be a very, very brief introduction (no more than 2 sentences or about 50 words) and the fifth should be a very brief conclusion (no more than two sentences or about 50 words). These make up the 2 in the 3-2- paragraph essay.

 

By putting these five paragraphs together, you would have written an essay about emerging geographies of urbanization under globalization in the core, semi-periphery and periphery focusing on spatial patterns ONLY.