Cities as Engines of Growth - e-Institute

Catalyzing 21st Century Growth:
The Role of Innovative Cities
May 8, 2012 | 10:00 AM EST
Speaker: Shahid Yusuf
Economic Advisor
World Bank Institute
Why do Cities matter for Growth
o High rate of urbanization and secular trend because of “urban
edge” in productivity and labor saving technological bias in
o Growing sectors are manufacturing and services, both urban
o Increasing share of GDP sourced from urban areas.
o Productive activities concentrated in few large cities e.g.
Seoul, Bangkok, Cairo, Karachi, Sao Paolo.
Sources of Growth
o Supply based growth estimated through production functions:
capital, labor and total factor productivity (TFP). For low and
middle income countries, capital and TFP are the principal and
complementary sources of growth (however, one must not
ignore labor).
o Demand based growth derived from: consumption,
investment, and net exports.
o Fast growing economies – national or local – rely on supply
push that is supported by demand pull. The two must work
Deconstructing (supply-side) Sources
o Capital accumulation requires an enabling environment
(national and local), entrepreneurship, and institutions for
mobilizing (from internal and external sources) and efficiently
channeling funds into productive uses in an urban milieu.
o Productivity of labor depends upon supply of (and
technological level of) capital equipment.
o Gains in TFP function of allocative efficiency of state and
markets, R&D, innovation, volume and quality of skills,
management and technology absorption.
Deconstructing the Demand-Side
o Stable national-level macro-environment that smoothens
cyclical fluctuations, contains inflationary pressures and
minimizes risks from bubbles.
o Expanding middle class (an urban phenomenon) that provides
steadily growing consumption demand for standardized
commodities and new products.
o Culture and institutions encouraging entrepreneurship and
enforcing property rights, thereby encouraging investment.
o Trade and FDI policies supportive of openness and that
promote exports. An open trading environment attracts FDI
and stimulates exports.
Enter Cities
o Success of supply and demand side drivers of growth depends
upon urban response to policies, market inducements and to
opportunities. Agriculture a small and shrinking share of
national product.
o For most countries, GDP growth derives from performance of
a few major cities. Recent trends and growth dynamics
suggest that this concentration in the urban sources of growth
will increase.
When is a city an “engine of growth?”
o “Engines” must account for a large share of GDP.
o Size confers agglomeration and scale economies and
contributes to innovativeness.
o Industrial composition and diversity contributes to growth, its
stability and exports.
o Share of high-consuming middle class greater in large,
industrially diversified cities.
o “Engines” deliver stable, sustainable growth.
Other Attributes of “Engines”
o Engines are frequently capital cities and enjoy other
geographical and historical advantages.
o Growing “engines” house major universities and research
entities, and accumulate labor and deep pools of skills from
national and foreign sources.
o Financial institutions concentrate in large cities
o “Engines” attract FDI that contributes to industrial
diversification and technology transfer.
o “Engines” are open, internationally connected, exporting
o Large cities have broader tax bases and can mobilize more
revenue to finance infrastructure and services.
Lifecycles of “Engine” Cities: Stage 1
o Historically engines have started out as industrial centers and
providers of administrative services (e.g. European engines).
o In earlier stages, they absorb labor and capital from rural
sector into more productive activities.
o Fast growing engines rely on growth of manufacturing sector,
and serve as trade and financial hubs (e.g. London, New York,
Lifecycle: Stage 2
o In maturing engines, manufacturing is superseded by
producer services and creative industries however,
manufacturing remains important source of employment,
innovation and TFP (e.g. Seoul).
o Innovation more broadly (including of services) acquires
greater salience.
o Exports remain an important driver of growth and of
o These cities continue to increase share of population and to
attract skills and FDI (e.g. Tokyo).
o ICT and transport infrastructure supporting connectivity has a
larger role.
Notable (new) Engines
o Ho Chi Minh City, Shenzhen, Singapore and Seoul are four
cities that highlight key attributes of engines.
o Their emergence as engines is relatively recent: in the 1960s
for Singapore and Seoul, in the 1980s for Shenzhen, and the
1990s for HCM City.
o Location was key in all four cases, two were/are
capitals/administrative centers.
Ho Chi Minh City
o Population (2010): 7.4 million (3 million in 1989) and
o GDP (2010): $24 billion (approx)
o GDP growth 2000-2009: 10% approx.
o GDP share (2010): 20%
o Share of manufacturing: 30%
o Share of exports: 40%
o Share of FDI: 35% ($12.2 billion stock)
o Internet penetration:2.2 million subscribers and 5.5 million
Population rose from 50,000 in 1979 to 10.3 million in 2010
GDP growth 15+ percent 2005- 2009
GDP 2010: $141 billion+
Export/GDP ratio: 1.45. China’s leading export city
FDI stock 2010: $30 billion
R&D/GDP in 2010: 3.4%
Transport hub: 4th largest container port in 2010
Internet penetration rate (2011): 78%
o Population rose from 650,000 in 1960 to 5 million in 2010 –
1.4 million were foreigners
o GDP growth 2000 – 2010: 6.6%
o Share of manufacturing in GDP: 22%
o Export/GDP consistently high (2010): 1.58
o FDI (2010): $618.6 billion
o R&D as percent of GDP: 3%
o Major transport hub: 2nd largest container port 2010
o Internet usage (2010): 78% of population
o Population 2010: 9.8 million (metro area 22.5 million)
o GDP (2008): $291 billion (city share about 24%; metro area
share of GDP is 48%)
o GDP growth 2000- 2009: 4-5% approximately
o Share of secondary industry in GDP (2003): 14%
o Export/GDP
o Skilled workforce: 50% have some tertiary education
o R&D as percent of GDP (2005): 3.14% of GDP
o Seoul/Incheon air transport hub (2010): 8th by international
passenger traffic; 4th by world cargo traffic
o Internet penetration (2010): 83%
The Future of Engines
o First mover, scale and agglomeration advantages can be
enduring if supported by good governance/metropolitan
o Innovation capacity advantages likely to strengthen – but
most innovation will be incremental.
o Can take the lead in greening growth, containing energy
intensity (especially of urban transport) and
introducing/producing new green technologies, products and
o Urbanization economies, skill concentration facilitates
diversification, buttresses export intensity.
o Edward Glaeser, 2011. Triumph of the City. New York, Penguin
o Margaret Pugh O’Mara, 2005. Cities of Knowledge. Princeton
NJ, Princeton University Press.
o Robert P. Inman, 2009. Making Cities Work, Princeton NJ,
Princeton University Press.
o Joan Fitzgerald, 2010. Emerald Cities. New York, Oxford
University Press.
o John D. Kasarda and Greg Lindsay, 2011. Aerotropolis. New
York, Farrar Straus and Giroux.
o John Montgomery, 2007. The New Wealth of Cities. Aldershot,
Ashgate Publishing.
Thank You

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