Hamish McRae: Never mind the eurozone – what really matters is the urbanisation of the world

To sustain and improve their services, most cities will need to be able to do better with less
  • @TheIndyBusiness

Let's stand back. The long agony of the eurozone will grind on awhile yet. The long slog of correcting UK finances will grind on too. But while they matter tremendously to us, these issues are small in the broader scheme of things.

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When they write the economic history of the first decades of this century the focus instead will be on the shift of activity to Asia and the rapid urbanisation of the world.

The first of these themes has received wall-to-wall coverage and for good reason: what China or India does has a profound impact on the rest of us. But urbanisation has been covered more unevenly, with emphasis slanted towards the problems that it creates rather than the benefits and opportunities it brings. A new paper by McKinsey Global Institute, Urban World – Cities and the Rise of the Consuming Class, focuses on the latter and deserves a wider audience.

The starting point is that economic growth is closely associated with urbanisation. As countries get richer more people move into cities. This relationship is shown in the chart, with the level of urbanisation on the horizontal axis and GDP per head on the vertical one.

As you can see, all the lines slope upwards and to the right, though the pattern is slightly different in different countries. Thus Brazil has reached a very high level of urbanisation while still at middle-income wealth levels, whereas Japan and Italy have high GDP per head while retaining one-third of their population in the country or small towns. The UK is unusual in that urbanisation peaked in 1939. And the sharp-eyed among you will have noted that wealth per head in China now is roughly the same as it was in Britain in 1939, while India has roughly the same as Britain in 1860. That is something that makes you think.

The theme of the study runs like this: About one billion people will enter what McKinsey calls the global consuming class by 2025, who have what one might call a modest, middle-class prosperity. Of this billion, some 600 million will be in 440 cities across the emerging world, and will generate half of the global growth to 2025. Only 20 of these will be megacities with a population of 10 million or more, and the rest will be medium-sized cities with a population of 250,000 upwards to the low millions.

Such rapid growth will create stresses because rapidly growing cities need huge investment in infrastructure. But cities are also part of the solution, partly because people are more productive if they live in them than if they stay on the land, and partly because it is cheaper to provide for people's needs if they are clustered together. That investment also will be a driver of growth, for they need to double their physical capital: homes, roads, schools, offices and so on.

These cities will also be a huge market for consumer goods. When people reach middle-class living standards they initially tend to want to buy more physical goods, household appliances, electronic kit, eventually motor cars. Once they have all this, then they tend to shift their purchases towards buying services –financial, travel, entertainment and so on.

The pattern of spending is also determined by the population's age. For older people in cities such as Shanghai much of the consumer market is for replacement or higher-quality goods. For places with younger populations, such as Lagos, the demand is more for products for babies and children.

These cities need a lot more buildings. McKinsey estimates that between now and 2025 they will have to build almost as many new residential and commercial buildings as the entire stock of buildings that exist at the moment. These cities will need a lot more water, a lot more power, and a lot more ports and other facilities. Managing this well will be an enormous challenge and municipalities will need help from the private sector to do so.

McKinsey thinks we in the West have rather ignored these opportunities, thinking still in terms of countries rather than urban agglomerations, and I think that is probably right. But my own concern is more that we still see urbanisation as a scourge rather than a blessing.

There is no doubt that the growth of shanty towns on the edge of these new cities is ugly and standards of urbanisation in much of the developing world could be improved. But we do forget that people move to cities because they offer a better life than would be available if they stayed on the land. Besides, just because a place looks a physical mess does not mean that it is a social mess, as anyone who has studied shanty towns in India will know.

Indeed, the problems of cities in the emerging world are very different from those in the developed world. In the latter the problems are usually concerned with the need to boost slow growth, rather than how to adapt to rapid growth. But there is one common factor, summed up by McKinsey here: "To sustain and improve their services, most cities will need to be able to do better with less. Involving the private sector can help bring in expertise as well as intelligence about what constraints may be limiting their growth in a particular city and how to overcome them."

I would go further. How will the 10 billion people who will inhabit the world in 2050 have reasonable living standards without putting too heavy an environmental burden on the planet? A big part of the answer will be to make these new cities function better. The challenge is to make high-density living safe, pleasant and satisfying.

There are examples of cities that work well. Tokyo, the world's urban agglomeration, is also the safest. Detroit, the centre of a metropolitan area of more than five million people, is one of the most dangerous in the US.

What matters will be whether the majority of those 440 cities that will generate half the world's growth will be well-run or failing ones. And all this is much more important to the world than what happens to the euro.