By Ramya Raghavan
Cities play a vital role in economic development. They provide benefits ranging from economies of scale to efficient infrastructures such as transportation, communication, technology, water, power and sanitation services. They help achieve urbanisation by attracting talent and skilled labour, enabling specialization in management capabilities, skills and knowledge. Cities are thought to be the cornerstone of development and growth of an economy.
Urbanisation has been considered to be positively related to economic growth. The story of achieving progress and prosperity as a result of urbanisation can be observed from the long history of mega and global cities—from ancient Rome to New York today. Urbanisation is thought to be the driving force behind the economic development and growth of several Western nations including the United States and Europe.
The process of urbanisation is heavily impacted by differences in institutional and policy settings, that vary from one country to another. Whilst popular notion suggests that bigger is better, recent studies conclude that the cities have had a larger impact on developed and industrialized nations as opposed to the developing world. The link between urbanisation and growth reduces in developing nations, which today, are going through the largest wave of urbanisation in human history.
In developing countries, smaller may prove to be better, and the phenomenon of “too much urbanisation” can be counter-productive. In several countries, such as Sub-Saharan Africa for instance, economic development has occurred without the presence of urbanisation.
Average city size and economic growth
Studies conducted by Susanne A. Frick and Andrés Rodríguez-Pose of the London School of Economics examine the relationship between the city size and the economic performance of the country. The link between average metropolitan-area size and aggregate economic growth, as measured by the GDP per capita is examined in a total of 114 countries across the world, for the period between 1960 to 2010. The study controls for several variables to ensure robustness, such as education levels, physical land area size, population size and economic openness, to name a few.
The size of metropolitan areas has grown at an exponential rate over the previous half-century, with the developing world experiencing faster and larger growth rates than developed nations. The median city in the developing countries quadrupled from 220,000 people in 1960 to 845,000 people in 2010, while between the same period, the median city in high-income countries experienced a modest growth from 500,000 to 650,000 people. By 2010, 70 percent of the top 20 countries with largest average city size were developing countries, as opposed to 60 percent being high-income countries in 1960.
Based on the studies, there is no universal, positive relationship between economic growth and average city size. The results vary widely between developing and high-income countries. Advanced nations have demonstrated consistent evidence of positive, yet declining link between city size and economic development. In contrast, data from developing countries reveal negative or no significant relationship between the two factors.
Analysing the causation
Why do global cities remain poor, if urbanisation helped drive economic development? Harvard economist Edward Glaeser pointed to the recent surge in “poor country urbanisation” while explaining this paradox.
A great deal of urbanisation today occurs through migrations, as people escape civil conflicts, natural disasters and wars than through economic forces such as the increase in production and demand for labour. Furthermore, balanced urban economic development has been eroded by the advent of globalisation, responsible for breaking away the age-old connection of a city with its hinterlands–local agriculture and industry, that it relied on, for food and resources. Inexpensive, imported raw materials flow from across the world through international shipping markets, and erode the livelihood of several in the countryside. Seeking jobs, country-dwellers move to megacities, resulting in the troubling, new pattern—“urbanisation, without growth”.
Due to these striking issues, poor megacities do not resemble the megacities of the twentieth century as they are faced with weaker institutions and governing structures, leaving them vulnerable to negative externalities such as the spread of diseases, higher crime rates and congestions. Whilst these problems can find solutions in the hands of competent, wealthy governments, the developing world lacks both the wealth and the robust institutions. Hence, developing nations obtain a larger economic growth from smaller and medium-sized cities.
Knowledge-intensive industries in high-income, developed nations are likely to require urban agglomeration economies. Countries that focus on knowledge-based industries derive the most economic benefit through a larger proportion of urban population living in cities.
Is urbanisation still relevant?
The importance of understanding the causation between urbanisation and prosperity is driven by the growth in the proportion of people living in cities; from 20 percent in the twentieth century, to nearly 55 percent today, with the predictions suggesting a rise to over 70 percent within the next 30 years.
The poorest, least-developed countries and several developing economies still reply on cities to be the key driver of their economic growth. Developing cities are relatively more productive compared to surrounding areas but still lag with respect to GDP growth, in comparison to developed countries.
The conclusion is that developing countries require cities, to grow and enhance the quality of living for its citizens, but does not necessarily require megacities. While innovative, knowledge-driven economies benefit from clustering, density and agglomeration, it does not hold true for developing nations, where smaller and medium-sized cities contribute more to economic growth. Urbanisation can propel economic growth, only if supported by appropriate policies, institutions and strategies.
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