Key message 1 – Urban productivity: Cities in the developing world can be both productive and liveable places

The fundamental advantage of cities is that of scale and density; the concentration of people enables economic and social interactions to occur more frequently and effectively. There is a great deal of evidence that cities have higher productivity than other areas. Studies of developed economies indicate that a doubling of city size (in a cross-section of cities) is associated with productivity being some 5–7% higher. This is large, suggesting that a city of 5 million people has productivity some 30% higher than a city of 300,000. Cities are also centres of innovation and entrepreneurship where new firms develop and new sectors grow. Similar effects have been found in developing countries, although less research has been undertaken and outcomes are mixed. Importantly, the potential of cities is not just to raise productivity in existing activities, but also to provide the environment in which new activities can take root. To be successful, new activities need to draw on the skilled workers and suppliers that can only be found in cities.

Why do cities have this economic advantage? Studies of agglomeration economies point to a number of mechanisms. One is that cities offer large markets. A large local market makes it easier to establish new firms and to grow them to scale at which they are efficient. This makes for more competition, breaking down monopoly power as multiple firms come to compete for customers. As well as offering larger markets, cities also offer more suppliers of the inputs that firms use; the presence of local suppliers means that inputs can be tailored to firms’ needs and supplied rapidly and flexibly.

Figure 1: Urban population (% of total)

These two effects are different sides of the same coin – one firm’s supplier is another firm’s customer. There is a virtuous circle here; suppliers have lots of potential customers and are able to specialise and raise their productivity; firms using these inputs benefit from the specialised goods and services that are available. These mutually beneficial and self-reinforcing effects operate most powerfully in the urban context where proximity enables good communication and rapid delivery of goods and services.

Similar arguments apply in the labour market, and suggest a positive relationship between cities and skills. Firms are more likely to be able to find the precise mix of skills they need if there is a large pool of labour to draw from. Reciprocally, the incentive for workers to acquire specialist skills is greater if there is a wide range of employers to whom the skill can be sold.

These forces lead to the clustering of economic activity, at the sectoral level, and more broadly through the city as a whole. At the sectoral level the combination of numerous specialist skills with the ease of face-to-face interaction supports urban concentrations of services (such as finance, law or film production) and of innovation intensive and high-tech activity. These clusters are common in developed country cities, and also arise in developing countries (such as the technology cluster in Bangalore), and as cities seek to become regional centres for the provision of business services. Manufacturing clusters used to be common in developed countries and are now moving to developing economies (such as the garment industry of Dhaka or the clusters of Sialkot).

Benefits of urban scale also arise in other activities. Public services such as health and education, and aspects of infrastructure provision such as sewerage and electric power can be supplied more cost-effectively to spatially concentrated populations than to dispersed ones. Social networks can be wider and more diverse in urban areas than in small towns or villages.

The key point on the economic potential of cities is that effective scale requires proximity and hence density of economic activity. It is not just the total population of a region, but the concentration of population in an area small enough to constitute an integrated market for labour and to facilitate close business linkages.

Soccer ball production in Sialkot

Sialkot is a large city in north-east Punjab, encompassing almost 2 million people and home to over 135 firms who exclusively focus on producing soccer balls. This unique cluster of firms was discussed by Hausman and Rodrik (2002) and analysed by Verhoogen et al (2014) in an IGC funded project. This cluster produces 30 million soccer balls a year, or about 40 percent of world production, including match balls for the 2014 World Cup, and about 70% percent of world hand-stitched production. In 2000, the exports of soccer balls from this cluster to the US was worth USD $23.2 million and remains one of Pakistan’s largest exports. This cluster provides an ideal setting for innovation – in the last few years Verhoogen and his team improved the efficiency of soccer ball producers by modifying their production technique.