Luanda, Angola. Photo by Eric Lafforgue via Getty Images.
Why cities are the engine of growth in developing countries
Urban areas now house half of the world’s population, and within twenty-five years, that proportion will surpass two-thirds – yet cities continue to receive far less attention than they deserve, including in rapidly urbanising parts of Africa and Asia. With cities driving economic growth, proactive investment and strengthening urban governance must become a national priority.
Despite a well-established body of evidence pointing to the important role of cities in growth, policy debates in low- and middle-income countries often continue to focus on how to prioritise rural development or national industrial strategies. However, both depend critically on how urbanisation unfolds.
The link between urban and industrial policy
Cities are where industry takes root. Efforts to improve the business environment – including through trade, tax, or regulatory reforms – ultimately hinge on the everyday functioning of cities, from infrastructure quality to the provision of basic services that allow firms to operate and grow.
Even in economies where agriculture dominates, cities are the primary conduits linking production to markets. Urban centres act as the main gateways through which rural production reaches domestic, regional, and international markets, shaping prices, incomes, and opportunities far outside city limits. Unfortunately, policy frameworks rarely reflect this reality. Public action tends to target specific sectors or firms, while underinvesting in the urban systems and institutions that make economic activity possible in the first place
A new video from the IGC’s Cities that Work initiative draws on perspectives from researchers and policymakers across multiple countries to explore why cities matter so profoundly for growth, and which reforms could unlock their potential.
Why are cities critical for growth and development?
Productivity is amplified in urban environments
Dense urban environments can accelerate the circulation of ideas, facilitate the sharing of inputs, and improve labour market matching. Research demonstrates that when a city's population doubles, productivity rises somewhere between 3 and 8%. These effects are not simply about size, but about proximity and connectivity.
The fiscal implications are also substantial. Pakistani cities, for example, contribute to over half of the national GDP and generate more than 90% of government tax receipts, despite containing less than half of the population. Cities are where the firms, jobs, and tax base are, and when they work effectively, countries grow faster.
Cities provide access to economic mobility and urban wage premiums
Migration to cities offers pathways to economic advancement that cannot be replicated in more dispersed rural settings. Newcomers can arrive with modest education and few marketable skills, and yet, through employment and informal learning, develop capabilities that reshape their economic trajectories.
Wage differentials between urban and rural workers exist in all economies, but they are far larger in developing countries. For example, IGC research shows that the urban-rural wage gap in Rwanda is roughly three times larger than that observed in high-income countries.
That is why cities can provide upward mobility: if people learn on the job and move into better work, household incomes can increase within a generation.
Sustainable growth benefits from urban density
Historically, urbanisation and economic development have gone hand in hand. Going forward, how populations concentrate spatially will be just as dependent on environmental sustainability.
For instance, building upwards rather than outwards dramatically reduces per capita energy consumption. As climate pressures mount and natural resources grow scarcer, density can cut per-capita infrastructure costs – but only if planning and housing supply keep up.
Further, it is cheaper to serve dense neighbourhoods. Connecting an urban household to piped water costs roughly one-tenth what it does in dispersed settlements, and electricity provision is approximately one-fifth the cost. Dense cities make universal services cheaper, and therefore more achievable.
The pace of urban expansion poses a governance challenge
Population growth consistently outpaces the expansion of housing, transport networks, and public services. When housing supply lags, rents rise sharply and commutes stretch to hours, immediately constraining household budgets and access to jobs.
These pressures are already visible in rapidly growing African cities. In Uganda, transport expenses absorb up to 30% of household earnings, a burden that could be substantially reduced by effective public action, with poverty-alleviating effects extending well beyond city boundaries.
The pressures and possibilities of urban expansion are foreseeable, but capturing them requires a strong commitment to proactive investments and policies that make cities work. This spans both ‘hard’ physical infrastructure and the ‘soft’ legal and administrative environment.
Making urbanisation a national priority
Two big constraints to urbanisation are finance and authority. In many cases, existing local revenues and municipal administrative capacity simply cannot finance the scale of infrastructure investments that rapidly growing cities require. Creating urban areas that serve all residents well necessitates elevating urbanisation to a core national development priority. Strengthening city governance, ensuring adequate fiscal resources, decentralising relevant authorities to urban administrations, and coordinating effectively across levels of government are fundamental to making cities work.
Cities that Work has developed a set of policy toolkits to help governments navigate the multiple trade-offs involved in designing and implementing a variety of urban policies:
- Urban land use: This collection covers two key policy challenges preventing efficient land use in cities – unclear and poorly administered land ownership, and unrealistic and reactive urban planning.
- Housing, infrastructure, and public services: This collection examines policy options for informal settlements, and improving transport, water and waste management services.
- Municipal finance and urban governance: This collection focuses on raising revenue through land and property taxes, building authorising environments, and using data for decision-making in cities.
- Firms and employment in cities: This publication explores how getting core urban policy right can create an environment for businesses to thrive and workers to access better employment opportunities.