World Economy

India, the sleeping giant of urbanisation

27 Apr 2010

"In that regard, 2008 was a landmark year in human history, as it is the first year that more humans have lived in cities than not."

The 21st Century will be the Information Age. Already four fifths of all economic activity in the developed world are services-based – i.e. run purely on information and talent. More and more key systems on which cities and countries are based are going through the same transformation that our communication systems did in the 1980s – they are going digital, creating new streams of information on, for example, where and how people travel or current ocean and wave activity.

True “value add” now no longer comes from holding or creating data (and charging people for it), but about visualising and analysing data, turning data into knowledge. This is something the World Bank has recognised – last week, it launched its Open Data Initiative. The initiative means that anyone can now access its World Development Indicators, a fifty-year database with dozens of key indicators of well-being and development, from its data.worldbank.org site.

The World Development Indicators do not contain all the answers to the most fundamental questions of our global society and economy – why are some nations so rich and others so poor? – but they do help ask better questions. One area of particular interest to me is the role of cities in economic development. For example, in his landmark “Wealth and Poverty of Nations”, David Landes contends that it was the competition among autonomous European cities for skill that helped launch Europe on its way to the Industrial Revolution in the eighteenth century.

In that regard, 2008 was a landmark year in human history, as it was the first year that more humans have lived in cities than not. While true as a global average, the regional breakdown is still very disparate, as the graph below (which uses the World Bank data) shows. In Western Europe-plus (i.e. including its Anglo-Saxon offshoots), rates of urbanisation are about 80%, the same as in Latin America. In Eastern Europe and Central Asia, urbanisation looks to have halted, while the Middle East/North Africa and China have industrialised rapidly at different points over the last few decades.

Urbanisation (% of total population), by geographic region

Urbanisation (% of total population), by geographic region

India and to a lesser extent Africa remain the sleeping giants of urbanisation, though, with only about one in three people living in cities. The African development question looks like only ever being resolved slowly and steadily. India, on the other hand, has the domestic market size and political infrastructure to echo China’s growth. India’s growth was until a generation ago impeded by its economy policies but economic growth rates have improved significantly since it and its workers joined the global economy.

Urbanisation in India may accelerate over the coming decades. As China and many other parts of the world that have urbanised quickly over the last generation or two can attest, urbanisation brings challenges for developing countries. These include not least the requirements for an adequate health and sanitation system as slums and shanty towns form on the edge of large cities, a problem India and Africa face already in their large cities. A second challenge is transportation infrastructure: subsistence farmers tend not to move around, while city dwellers are members of the national economy, moving around to work and trade. Already a concern is that a tipping point in per capita income may be reached that throws tens of millions of new cars onto existing streets.

Urbanisation is on balance a huge opportunity, though: managed well, it turns people from subsistence farmers into people that learn skills and specialise. The principal driver of human well-being over centuries has been specialisation and the division of labour, which allow people to create huge new gains from exchanging with each other.

Ironically, despite cities enabling the huge levels of wealth we now enjoy throughout the developed world, the precise channels through which they do this remains a mystery to economists. How does spatial agglomeration turn into wealth: through the creation of ideas or purely through the eradication of travel costs, for example? This is an open research question.

Whatever the answer may turn out to be, the ultimate relationship is clear: cities and wealth go hand in hand. The graph below uses 2008 World Bank data on almost 170 countries. It shows a simple scatter of per capita income across countries by urbanisation rates. As any first year economics student will tell you, correlation is not causation, but the strong positive (exponential) correlation shows harnessing the growth of cities is a vital pillar in economic development.

Scatter of urbanisation and income, 2008

Scatter of urbanisation and income, 2008

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One Comment

  1. Jagdip Singh said on April 27, 2010 | Permalink

    Interesting Ronan. As always the tendency is to relate the article to Ireland and in that regard I found the Cushman and Wakefield property and economics report for Europe last week to be interesting because Oxford Economics and C&W were forecasting that in Ireland for the next couple of years at least the State would grow economically at twice the rate of Dublin – that’s not the same as saying we won’t have more urbanisation in regional centres but it was of interest to see the academic view that our capital not performing as well as the rest of the country. The report is freely available (registration is required) at

    http://www.cushwake.com/cwglobal/jsp/kcReportDetail.jsp?Country=GLOBAL&Language=EN&catId=100006&pId=c28600007p

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