Cities, not countries, are the key to tomorrow’s economies

Each passing week provides a million new reasons to rethink the view that countries are the fundamental building blocks of civilisation in the 21st century. For that is the number of people who make the journey from country to city every seven days, exchanging rural for urban life with no intention of going back. That is equivalent to populating eight cities the size of New York every year.

This shift means that nearly half of the economic growth expected over the next decade will take place in just 400 cities in the world’s global growth markets. (Please: can we stop calling them emerging markets?) It will create an urban consumer class of 4bn people by 2025, up from 1bn as recently as 1990. These are large numbers. And our traditional way of viewing the world as a collection of national economies cannot provide a clear view of this transformation. To make wise decisions, investors and policy makers need to view the world not so much as a collection of countries but a network of cities. Urbanisation on a massive scale is here to stay, and it is a path we have not travelled before.

From Rome to Athens, Istanbul and Beijing to Damascus, urban centres have always anchored human activity; an air of permanence surrounds them. But cities matter more now than ever, especially in the global growth markets.

Cities are in fact more stable fixtures than countries in our geopolitical, economic and cultural landscape. As the decades since the fall of the Soviet Union have shown – and as the Ukrainian crisis is making vivid once again – national boundaries advance and recede far faster than the cities within them rise or fall. And cities have become a requirement for prosperity. Rarely does a country achieve per capita income levels of $10,000 annually until at least 60 per cent of its population shifts towards urban centres.

Never before have so many of us lived in cities. Humanity’s past is rural. Our present is urban, and our future even more so. According to the World Health Organisation, more than half of the world’s people now live in cities, and 70 per cent of us will do so in 2050.

This is not about semantics; it is about fundamentals. View a country’s economy through the lens of aggregated national statistics and you see a blurry picture of what is going on at the grassroots. City economies now matter far more than national ones. Few of us invest in a country. We back a business or sector on the basis of the relevant context of risk and opportunity; and this context – especially for consumer-facing businesses – is urban.

We all know this to be true. When it comes to our own backyard, people take a highly nuanced view. Mention to a Chicagoan that his home town has the highest homicide rate in the US and he will tell you he knows which neighbourhoods to avoid. Ask an estate agent about London, and she will focus on specific districts and, within them, on certain streets. To channel Tip O’Neill, the late speaker of the US House of Representatives: just as all politics is local, so is all economics.

This is just as true beyond developed markets. Contrast the clustering of large businesses and populations in capital cities across the world’s growth markets with the fact that virtually every state in the US is home to a few Fortune 500 companies, and you will see a picture of the concentrated economic power these cities represent. You just cannot ignore the drivers of future economic activity.

Consider that Indonesia is growing at 6 per cent a year. This is a striking statistic, at a time when many western economies are moribund. But it is also a useless one, when it comes to decision about policy or investment. It masks the fact Jakarta’s economy is growing at a robust 14 per cent. Meanwhile, numerous islands in the Indonesian archipelago are as far removed in economic terms from this engine of prosperity as they are physically distant from their capital city. The same is true of Nigeria. Lagos, its largest city, is growing at least twice as fast as the country’s north, rendering the nation’s average growth rate meaningless. So far as economic opportunities go, Lagos has much more in common with Accra – three countries away, in Ghana – than with the Nigerian capital, Abuja. Indeed, Lagos is primed to become the 13th largest economy in all of Africa – counting both city economies and national ones.

National governments need to recognise that they have a dual imperative. One is to build the roads, figurative and real, that connect their villages to their cities. The other is to construct the bridges, concrete and virtual, that enable cities to project themselves outwards, into the global economy.

For example, cities within the Pacific Alliance nations of Mexico, Colombia, Peru and Chile contribute about two-thirds of the bloc’s combined gross domestic product. In three dozen of those cities, GDP is growing 20 per cent faster than the national averages. By investing billions in infrastructure, removing tariffs on most merchandise trade within the group and expanding their links to Asia as members of the Trans-Pacific Partnership, these countries are taking steps to expand opportunity and attracting attention from investors as a result.

Such policies not only raise the living standards of newcomers to the cities; they also create opportunities for emerging businesses. As more investors acknowledge the vital role cities play in driving economic development, they will start to see our backyards the way they see their own – and they will increasingly seek opportunities outside the developed world.

The writer is the founder and group chief executive of the Abraaj Group, a global investment firm

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Letters in response to this opinion:

Cities depend on exploiting resources / From Ms Maria Walsh

Reverse uneven development and pour money into the peripheries / From Mr Nicholas M Gilani