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The Rise of the Megacity

Investors and policy makers should tap into the economic potential of cities in emerging markets.

What is the Big Idea?

Gross Domestic Product, or GDP, is a statistic frequently invoked by economists, investors and policymakers when they want to gauge the size of a country’s economy. Pull up any story this week about Greece, Italy or Portugal and their role in the European debt crisis and there will be some mention about the countries’ sliding GDP.

GDP as a barometer for economic health, however, is not without controversy. Planet Money’s Adam Davidson argues that to truly understand the US and Europe’s financial foibles, we have to look beyond GDP and GDP per capita and address issues with Europe’s labor force and common currency. Parag Khanna, Senior Fellow at the European Council on Foreign Relations, proposes an even more granular approach by making the case for an economic performance index for cities. He argues that the current metrics for country performance fail “to take into account that a city’s fate can often be decoupled from that of its home country.” Europe’s debt crisis exemplified this as cities like Athens, Rome and Lisbon had lower unemployment rates and rebounded faster than the host countries of Greece, Italy and Portugal, according to Khanna. This trend is also apparent in the world’s emerging markets.

“The enormity of Mumbai’s GDP is important not only in and of itself but also in relation to India’s overall GDP,” said Khanna. “You need the latter to understand the significance of the former and vice-versa. In places where a national economy is driven by the activities of one city – such as Moscow in Russia – this principle applies as well.”

Doha in Qatar is another example as is Ukraine and Egypt, where over 90 percent of foreign investment goes to the capital cities of Kiev and Cairo, according to Khanna. Still, GDP numbers are not perfect and can’t capture other important qualities about a city.

“GDP falls short on a number of counts such as difficulty of differentiating and splicing transnational activity and inputs and lack of a sustainability function,” said Khanna.

Investors and policy makers should evaluate the “quality of infrastructure, the stability of governance, the connectivity of the city internationally, the quality of the workforce, the ease of doing business, and other such metrics” when deciding where to focus their resources and efforts.

What’s the Significance?

Today, 600 urban centers generate about 60 percent of the world’s GDP, according to a recent report by McKinsey Global Institute. By 2025, some of those cities will fall off the top 600 and 136 new cities will make the list, all of which are from the developing world and 100 of which will be from China. The report forecasts “new hot spots emerging and household wealth surging in little-known urban centers,” and advises that companies may have to adopt “a much finer-grained approach to tap into the growth that lies ahead.”

To illustrate this, here is a round-up of major cities from BRIC countries. The numbers indicate the percentage of their country’s total GDP.

The GDP per capita in each city far exceeds that of its host country, which means that cities offer a better quality of life compared to what is available for the country as a whole. City dwellers produce and spend more to contribute to their national output. That’s not to say that there is no poverty in megacities like Mumbai, where Dharavi, the second biggest slum in Asia, is sandwiched between Bollywood and the city’s financial district. Huddled in the masses below Shanghai’s bright lights, behemoth skyscrapers and shiny new high-speed trains are millions of people who are barely scraping by.

So why should ordinary Americans care about what happens to the one million Indians who call Dharavi home or the migrant workers in Shanghai who are living below the poverty line? Khanna evokes the catch phrase of another famous economist and author Paul Collier when he address the question.

“Knowing the purchasing power of people around the world in GDP terms can give an important sense of where they stand on the economic growth ladder and thus helps us imagine what they can buy, and from whom, and sheds some light on how they might live their lives,” said Khanna. “Most fundamentally, we can realize by looking at the economic value of even slums just what enormous economic zones and potential they represent. Hence the impact of the ‘bottom billion.’”


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