# **1. Introduction**

Dhaka, one of the world’s fastest growing megacities, is projected to grow from its current population of around 14 million to nearly 25 million by 2035. Already there is intense strain on land, transport and other city infrastructure, yet there is also a substantial area of land near the city center that is largely unutilized - East Dhaka, a flood prone expanse of 107km<sup>2</sup> . Alternative policies for the development of this area have been studied by the World Bank and are outlined and reported in Bird et al. (2018). This background paper to that report explores the possible economic effects of policies that enable an orderly development of this area, principally by placing an embankment and related flood protection measures around East Dhaka, and improving transport links to and through the area. It also investigates the implications of policy to facilitate the development of new service sector activities in the area, in which case the area’s potential has been compared with that of the Pudong district of Shanghai in the 1990s.

The development of such a large area poses numerous questions for the future of the city. What will be the impact of the development on the total population, employment and income of the city? How will other areas of Dhaka be affected by such a development? What will be the impact on different types of economic activity and on workers with different skill levels? It also opens questions on how best to maximize the potential benefits from the embankment: what additional returns arise from developing the city’s transport infrastructure at the same time? Can complementary policies that aid cluster formation further enhance the impact of the embankment on the city’s output and employment?

To explore these issues, a novel urban computable equilibrium model is developed. There are several key features of the model. First, it is founded in micro-economics; the behavior of households and firms, including their location choices, and their interaction through markets for goods and services, labor and land is directly modeled. Second, the model is highly spatially disaggregate, containing 266 distinct areas, the ‘unions’ of Dhaka, together with detailed knowledge of economic and residential activity in each and the transport network linking them. Third, the model covers three distinct types of productive activity, two laborskill levels, and explicitly models housing choice. These distinctions enable us to capture developing country features of a large ‘non-tradable-services’ sector that corresponds approximately to informal employment. Fourth, we capture the distinction between modern, potentially multi-storey, housing and traditional low-quality housing with two different building technologies, ‘modern’ increasing capacity by building tall, and ‘traditional’ where urban density can be increased by ‘crowding’. The model is fitted to data on Dhaka and then used to simulate the effect on Dhaka as a whole of alternative development strategies for land in East Dhaka.

In containing multiple sectors and skill levels, the model used draws on an older computable general equilibrium (CGE) tradition. It is important to have these features, particularly in a developing country city, precisely because of the wide range of skills contained in the labor force and the extreme heterogeneity of productive activities, including the high share of the 2