The growing economic power of cities.

AuthorCadena, Andres

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).

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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. (8) As a result, the city's GDP grew by 4.5 percent per year between 2000 and 2007, significantly outpacing the national growth rate of 3.2 percent. (9)

Still, some less well-known cities have established extraordinary competitive advantages by developing themselves as hubs for skilled labor. For example, during much of the twentieth century, Tampere, Finland was a hub for textile manufacturing and the metal and paper industries. However, in the last two decades, Tampere transformed itself into a global center for wireless communications (the city is home to one of Nokia's research centers) and other advanced technologies.

THE SHIFTING URBAN LANDSCAPE

Between now and 2025, the center of gravity of the urban world will shift South and East. Today, just six hundred cities are home to one-fifth of the world's population and generate 60 percent of global GDP (Figure 4). MGI estimates that in 2025, the top six hundred will still generate 60 percent of global GDP, bur it will be a dramatically different group, with many new cities coming from Asia and Latin America. Approximately 110 cities from developing countries will join the ranking, eighty-six from China alone, including lesser-known cities such as Linyi, Kelamayi and Guiyang, and ten from India, including Surat and Nagpur. The group will also consist of approximately 210 new middleweight cities (with populations between 150,00 and ten million), most from emerging markets, including Cancun, Mexico and Belem, Brazil. (10) At the same time, one out of four cities in developed economies and one out of twenty in emerging economies will no longer make the top 600 (ranked by GDP).

By 2025, about four hundred emerging-market cities will generate almost 45 percent of global growth. These urban powerhouses are not just well-known megacities but also include dynamic middleweight cities. Chinese cities alone will generate about one-quarter of worldwide growth between 2007 and 2025.

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The rise of midsized cities is among the most powerful forces for global growth today, raising the incomes of billions and continuing to fuel global demand for goods and services. Companies that want to position their portfolios for growth must therefore look beyond markets in developed economies to middleweight cities in emerging markets, which are expected to contribute more than a third of global GDP growth in the next fifteen years (Figure 6). Many of the emerging middleweight cities--including Vadodara, India; Huambo, Angola; Quanzhou, China; Samarinda, Indonesia and Guayaquil, Ecuador--are not well known today. As a result, companies need to assess and bring up to date their global strategies against the shifting economic landscape. This means first identifying the most promising urban markets for their businesses--not a trivial task. In addition to the fact that many companies have limited awareness and data about emerging middleweight cities, the definition of an "attractive" urban market varies between companies and products.

PATTERNS OF URBANIZATION: DEVELOPED REGIONS

Patterns of urban growth vary...

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