India’s urbanization is like a revolution: McKinsey’s Jonathan Woetzel
Kolkata: Urbanisation is an irreversible process and a necessary condition for economic growth, says Jonathan Woetzel of McKinsey Global Institute (MGI), a research arm of the global consulting firm.
A senior partner and director at MGI, Woetzel, based in Shanghai, advises Asian businesses on global growth. He is also an expert on urbanisation and has led numerous research initiatives into related subjects such as affordable housing.
He was in Kolkata recently to meet lawmakers, government officials and business leaders.
In an hour-long chat on urbanisation, Woetzel said the key to building smart cities is to create trust among stakeholders, which, in turn, leads to investments in infrastructure.
From the standpoint of resource allocation by governments, how important is urbanisation?
Urbanisation is a necessity. There are no rich countries which are not urbanised. There are, indeed, some urban countries which are not rich, or urbanised areas which are not rich, but being urbanised is a necessary condition to become a prosperous society. And urbanisation is like flipping a switch: it doesn’t stop, it doesn’t go back, it just goes on year after year.
What we can say is urbanisation today is happening at a pace and a scale which is effectively 3,000 times the impact of the UK industrial revolution. So how did we arrive at that headline number? When the UK experienced industrial revolution, it took about 150 years to double income and to move people from farm to factory. And then, as time went by and urbanisation happened about 100 years later in North America, Europe and in Germany, it took 50 years to double income.
For India, as it urbanises, it is taking about 10-15 years to double income. And, of course, we are not talking about 10 million people but we are talking about a billion people. That means we are moving 10 times faster with 300 times as many people. So, 3,000 times the impact. This is a revolution—an asteroid hitting the planet
So what are the key challenges to urbanisation?
A city is a productivity engine: a place for high density, high frequency interactions. That’s keeping a lot of people together, and you force them to interact with each other. That’s what a city does. And higher the density, higher the frequency of transactions, more rapidly the engine turns over and more productive the city becomes. Social challenges (in achieving this) automatically come down to the question of access to life in a city, access to employment, access to education, access to public goods, access to entertainment, and all in a manner which is sustainable.
In practical terms, it comes down to various challenges, the first one being finding affordable housing within an hour-and-a-half’s commute for everybody to their work. We know this for a fact that people who commute to work for more than two-and-a-half hours have poor lives: they are more likely to be alcoholic, more likely to be divorced, their children are more likely to go to jail, and they will lead shorter lives. It can’t be a good thing to spend 20% of your day sitting by yourself or standing in a bus.
People do not actually want to commute but they have to. So the second big challenge is to figure out a way how to get people access within their communities, within their neighbourhoods, to the things they need. Why are jobs so far away from where people live? Why are the hospitals so concentrated in one part of the city? Why are the primary schools not available in their neighbourhood and are not good enough to go to? So that’s the second big challenge. Public transport, of course, is a huge component of that because if you are spending three hours of your day standing on an unsafe, unreliable public transit, your life is not very good.
And the third thing, which may be more controversial, is the inclusion of migrants. For most cities, growth is going to come not through population, but from migration. You need to think about migration in a different manner in the light of the fact that the native population no longer is producing children. We know that migrants, for example, are the leading source of entrepreneurship. In Silicon Valley, for instance, 40-50% of companies are headed by people who came from other countries. This is true globally.
And some cities are favourably disposed towards migration, saying migrants are to be invested in, and they are assets which will ultimately yield return. So if you treat migrants as cost, they will behave as costs. But if you treat them as assets, they could invest in schools, hospitals, pensions and this inclusion will then lead to cities becoming more productive. It may not happen in the first year, but let’s say in 4-6 years, you can get to see that. Migration typically has a negative fiscal impact in the first year or two, but then starts to turn around.
And, of course, it depends on the type of people migrating: whether they are all working age population, which is, generally speaking, a very good thing, or do they have lots of kids and lots of old people in which case it is a bigger challenge. Of course, if you have only working age population, typically they send more money away and they often leave. So having the capability to integrate migrants makes a difference. So three things—housing, transport and migrant integration—I see these as three main challenges on the social side.
But because of people moving in, the character of cities is changing...
The average life of a building now varies between 20 and 60 years depending on where you are. And in fast urbanising societies, it is closer to 20 than 60. So, in the European-built cities, it is more like 60s, in the American ones, more like 40s, but in Chinese cities, it is more like 20s.
China doesn’t lease out land for more than 20 years to industry, and residential spaces go out for 50-70 years. And they are very comfortable with that: they will knock it down and build again. It’s a very plastic society and I would say that is the big characteristic of an urban environment. So they are, first, intensely unromantic; there is no attachment to the past. It is the recognition of the value. The Chinese overnight created the urban middle class by giving all workers of state enterprises the rights to their dwellings at a nominal price. Overnight 100 million Chinese people became property owners. That created the urban middle class.
What is the key to building smart infrastructure?
Infrastructure we know is an enabler; its returns are typically measured in terms of a multiplier. As we talk about private sector investors, they do not operate usually on the time frame of 100 years. It is a constraint. The challenge is to balance the long term capital requirements of city building with a short term return mentality of the private sector. Where is the long term private sector capital that should be invested in pension funds? This is where the market is not working, so long term infrastructure finance is not coming to the table.
The economic challenge (for urbanisation) is to recognize that we are all in it together, and that the success of a city in creating wealth is a collective success. Ultimately, success should be measured by the ability to increase demand for your products and services. Funds come from value creation; if there is no value creation, if people are not becoming more productive, there is not going to be any more funding.
So who brings in the resources?
Local challenges (to infrastructure building) have to be solved by local communities. So it is all about trust, and trust creates savings and savings create investments. No trust, no saving, no investment. Trust is a political question actually. That’s why we see great cities built by great leaders who can create that social trust.
But pollution is a niggling concern: how do you deal with it?
If your purpose is to simply avoid pollution, why do you build a city in the first place? Being a green city isn’t the point. The point is to be a great city, which is also green. Every economic and social decision one takes has an environmental consequence and vice versa. Every time you decide to invest in a park, you will have an economic and social impact. Environment is part of your equation; it is not something separate.
It is always easier to prevent than to remediate, much rather fix things before they happen. The good news for India and China is all these environmental problems are coming at much earlier stage of economic development than it did elsewhere and they are coming after other countries have identified what those answers might be. Air pollution, for instance, is coming at a low rate GDP per capita in India than it is in US.
You may have noticed that air pollution was getting bad in the 1970s and 1980s when the US GDP per capita was $10,000-12,000 or thereabouts. At that point, they made massive investments in cleaning up and that investment was far larger. In India, it is much earlier in the process that this problem has been identified. I think all these problems are addressable. Economists would say India’s advantage is its backwardness.