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Firms and employment in cities

Cities are where economic development really happens.

At their best, cities enable firms and workers to cluster together to perform a ‘miracle of productivity’. The key ingredients for this miracle of productivity are scale and specialisation. Adam Smith conceptualised the importance of these through the lens of a pin-factory. When pin factory workers specialise on particular tasks and form part of large-scale production processes, they can become 200 times more productive than when working alone. Scale and specialisation have powered economic transformations from the industrial revolutions of Paris and London to Shenzhen’s recent rise from a small Chinese fishing village to a global industrial hub.

Many developing cities do not generate scale or specialisation; employment is predominantly in single-person firms and focused on basic local service provision such as informal repairs or retail. In part, this is due to the structure of the city itself – sprawling land use and weak transport links means cities do not provide physical connectivity. Reforming the land-use and transportation systems of cities are therefore a prerequisite for productive firms.

Beyond land-use and transport reform, there are a number of policies which can promote the growth of productive firms in cities. Cities that Work focuses on policy decisions faced in two particular areas:

  • Tackling the legal and administrative barriers that prevent firms from establishing and growing
  • The creation of dedicated high connectivity and high ‘ease of business’ Special Economic Zones’ for firms to cluster in