The Growing Economic Power of Cities

Amid the gloomy context of the global recession, there is a ray of light: a massive wave of urbanization propelling growth throughout the developing world. By 2025, many of the six hundred cities expected to generate 60 percent of global GDP growth will be in the South and especially the East. The group will not just contain well-known megacities but a new breed of dynamic "middleweights"--midsized cities that are among the most powerful forces for global growth today. The rise of emerging-market cities is significant because these urban centers are proving to be the world's economic dynamos, attracting workers and productive businesses. This article explores the rise of both middleweight cities and megacities in the developing world. Drawing lessons from cities that have successfully blazed the trail to urbanization, the authors will demonstrate how local governments can impact the scale and speed of economic development in their regions and how private investment in buildings and infrastructure today will shape the global economy in future decades. Today, world economic growth faces a number of powerful negative forces. Rapidly rising levels of public and private debt in developed economies have led to a prolonged period of deleveraging, depressing consumption. After decades of decline, volatile resource prices are squeezing the purchasing power of households and increasing costs for businesses. Aging populations in the United States, Europe, Japan and China are causing the global demographic dividend to decline-sucking even more vigor out of consumption and growth. (1) However, the massive wave of urbanization rolling across the developing world is counteracting these headwinds. (2) For instance, the scale and pace of urban expansion in Asia are unprecedented. More than half of the global population lives in cities today, according to the United Nations. By 2025, more than half of the world's urban population--two-and-a-half billon people--will live in Asian cities. (3) By that date, the number of urbanites in India and China will, respectively, double and triple that in the United States. China's economic transformation, driven by urbanization and industrialization, is happening at a hundred times the scale of transformation seen in Britain, the world's first country to urbanize, and in just one-tenth of the time. (4) CITIES AS ECONOMIC DYNAMOS For centuries, cities have offered higher standards of living than rural areas. (5) Economists estimate that from the birth of cities until at least the Industrial Revolution, the average income of city dwellers ranged from one-and-a-half to three times that of their rural counterparts. (6) In China and India today, average urban incomes are roughly three times greater than rural incomes (Figure 1). This income gap reflects both the capacity of cities to attract skilled workers and productive business and the capacity of economies of scale to reduce the cost of supplying basic services and enable workers in cities to be more productive. (7) Cities--and particularly large cities with populations of 150,000 or more--can reduce the average costs of delivering basic services. Research performed in India by the McKinsey Global Institute (MGI) has found that it is 30 percent to 50 percent less expensive for cities to deliver basic services like water, housing and education than it is for sparsely populated rural areas (Figure 2). This is because large cities can deploy common supply depots to decrease distribution costs. They also tend to be magnets for highly skilled, productive businesses. For instance, financial services often cluster in regionally established financial centers; nearly 95 percent of global-equity market capitalization is based in twenty-four cities (Figure 3). [FIGURE 2 OMITTED] Companies often recognize higher-profile international cities far sooner than smaller, lesser-known cities. For example, the Polish capital, Warsaw, is a highprofile city that capitalized on its integration into the European Union and soon became the entry point for foreign investors looking for opportunities in Poland. …