Urbanization boosting economies world over

Urbanization boosting economies world over

Sometime in 2008, the percentage of the world’s population in urban locations exceeded that in rural areas for the first time ever.

To be sure, this shift largely reflects urbanization in emerging economies, including China, given that the populations of most developed economies have been concentrated in cities since the mid-20th century.

Also See | Cities’ Relative Share Of National Gross Domestic Product (GDP) And Population (2008) (PDF)

As for particular areas of growth, cities tend to be ranked in size according to population. However, to assess relative importance in economic terms, one also needs to take into account average per capita incomes. Cities such as London, New York, and Tokyo are major economies in their own right, even bigger than medium-sized national economies such as Sweden or Switzerland.

Higher per capita income

Urban residents in general are better educated and more productive than their rural counterparts, and also have higher incomes. Then, too, urbanization makes a country’s economic growth more stable—as domestic consumption increases, economies become less dependent on the trade of commodities that are often produced away from urban areas.

Education and healthcare

A recent study of students in 65 countries/economies concluded that, on average, students in city schools perform better than students in rural schools, even after accounting for differences in socioeconomic backgrounds.

Given that urban residents, in general, have access to healthcare systems, they have greater interaction with trained medical personnel, so that child mortality rates are lower than in rural areas.

Interestingly, the situation today is very different to that of the nineteenth century. At that time, migrants to cities could expect poorer health and shorter lives. In the late nineteenth century life expectancy at birth was 51 years in English villages, but only 44 years in London. Similarly, the infant mortality rate in British cities was 196 per 1,000 live births, versus 138 in rural areas.

Superior productivity

Likely reflecting relatively well-educated and healthy employees, urban-based enterprises have superior productivity, with the result that cities generally contribute disproportionate amounts to the gross domestic product (GDP) of nations. So, for example, in Brazil, India and China, the largest cities contribute significantly more to the national GDP than what could have been expected based on their relative shares of the population.

Higher incomes

Not surprisingly, residents of cities also have relatively high incomes. In a study of 150 of the world’s largest metropolitan economies located in 53 countries, it was found that nearly four in five of the metro areas reported average incomes that exceeded the average for the country.

Some cities wealthier

Per capita income multiplied by population is a measure of a city’s GDP. Economists at PricewaterhouseCoopers pieced together data from a number of sources to produce a ranking by GDP (at purchasing power parity exchange rates) of the largest urban economies in the world in 2008. They also projected urban GDP rankings for 2025.

The findings illustrate that, as they move up the rankings, the largest emerging market cities are forecast to grow at a faster compounded annual rate (6-7%) than the cities in advanced economies (around 2%).

Obviously, reflecting the methodology outlined above, a city can move up or down in rank either because of changes in population and/or average per capita incomes. The populations of major European cities—including London—are forecast to remain virtually unchanged through 2025, while the populations of emerging mega cities in India and China are forecast to grow rapidly, in part reflecting immigration from rural areas.

India chapter

The industrial corridor in India stretches over 1,500km from Mumbai to New Delhi. This includes a number of relatively important cities such as Indore (India’s 15th largest city, and the location of a newly created Special Economic Zone), Jaipur (an important centre for modern and traditional industries), and Gurgaon (a high technology hub south-west of New Delhi).

Opportunities for financial firms are being created by the rapid development of the Indian industries—sales of the largest non-financial companies have grown at a double-digit rate in recent years. Moreover, Indian economic growth has also been accompanied by an increasing internationalization of the industries. As India’s companies grow in their home market and expand abroad, their financing needs become increasingly complex.

Concomitant with the growth of India and its mega cities, the wholesale banking revenue pool should grow substantially in the coming years and banks such as State Bank of India, ICICI Bank Ltd and Standard Chartered Bank are poised to gain.

Graphic by Yogesh Kumar/Mint

Edited excerpts from a report by Citi Global Markets. Your comments are welcome at mintmoney@livemint.com