The power of cities can pull us out of economic black hole

Earlier this week, the Asian Development Bank also revised downward its forecast for Asian growth for 2013 from 7.3 per cent to 7.1 per cent, and the World Trade Organisation cut its forecast of world trade growth from 3.7 per cent to 2.5 per cent.

The deflation in the advanced economies comes from their weak financial systems, overhanging fiscal debt and rising unemployment. Their central banks are trying to push up growth through quantitative easing and low interest rate policies, which seem to have long-term consequences that are not yet fully understood. What we do know is that the long-term savers are paying for the losses from the financial crisis. Low interest rates are reducing the income of pension and insurance funds, with the result that pension funds are either running large deficits if they are committed to defined benefits, or their payouts to pensioners are reduced substantially because defined contributions are yielding very low returns under the low-interest regimes.  

The bad news is that the emerging economies, which are supposed to be the new engines of growth, have not decoupled from the advanced economies. China and India are both slowing down and there is no global strategy to stem the slide into recession. Even the UK Financial Services Authority is loosening its bank regulatory stance because it realises that excessive regulatory tightening at this point may be counter-productive in reviving growth.

The trouble with cutting pensions, fiscal tightening and regulations that tighten leverage is that these are pro-cyclical deflationary forces. Where are the countervailing growth poles?

Most national governments are at a loss over how to deal with the deterioration in overall sentiment, which could be self-fulfilling if not corrected.

My own assessment is that there are three main forces that still have the power to act, what I call the three C’s: corporations, civil society and cities.

On the whole, the global corporate sector has emerged from the recession in pretty good shape, especially top multinationals that are not highly geared, with good innovative power, global nimbleness and willingness to invest in markets with good growth potential, many of which are in Asia.

Civil society is increasingly emerging as a third force, with an increasing number of individuals willing to fund, act and work for the public good. The rise of philanthropic efforts, such as the Gates Foundation, contribute significantly to innovation, research and development and seed funding of ideas that may change the world.

But it is the power of cities that remains the bright spot of an otherwise gloomy global economy. As the McKinsey Global Institute’s excellent June report on “Urban World: Cities and the rise of the consuming class” rightly pointed out, “Cities have been the world’s economic dynamos for centuries.”

Cities play a crucial role in world economic growth because they are the hubs of economic, cultural and intellectual activity. The success of economies depends on the success of cities and their surrounding regions. Japanese industrial power was founded around the Tokyo-Osaka corridor. Silicon Valley has been the intellectual nursery of technological innovation because of the crucial corridor between San Francisco and Palo Alto, with its concentration of top universities.

At the same time, economies that have not succeeded in the growth league can be seen by the dysfunctional metropolitan sprawls of Cairo and Lagos.  

Cities play such an important role because they are the frontline of the growing global population, the clash of rural and urban cultures, technology and rising aspirations and more often than not, social frustration at inequities.   

The rise in China has been manifested by the rise of Chinese cities. The proportion of China’s population living in cities passed the 50 per cent level in 2010, double that in 1990, and will probably reach 70 per cent by 2035. Chinese urbanisation is happening at 100 times the scale of UK urbanisation and at 10 times the speed.

The McKinsey study estimates that from 2010 to 2025, the GDP of the top 600 cities of the world will increase by US$30 trillion, or nearly two thirds of global growth. Of this, 440 emerging market cities will contribute $23 trillion, or just under half of global growth. Annual global infrastructure investments will double from $10 trillion to more than $20 trillion by 2025, much of this in the emerging markets. A lot of this will be in Asian cities.

Managing this dramatic transformation is both a huge opportunity and a potential nightmare. Travelling through the United States, you appreciate what a huge challenge is ahead to transform ageing infrastructure in “hollowed out” city centres with sprawling suburbia. And yet, if you see what Mayor Ed Lee is doing in a bid to make San Francisco the technology capital of the world, and what a cultural and intellectual renaissance has happened in South Korea from the rejuvenation of Seoul, you do believe that cities can make a difference. 

Getting cities to be become smarter and better places to live in will require better dialogue and understanding between the city leadership and its citizens. McKinsey identified three key lessons from its research on successful cities in China, India and Latin America – better planning and implementation; capable and accountable governance, and sustainable and responsible fiscal management. 

There is also an important element, especially for cities under national governments – the relationship between the central government and municipal government, especially regarding the sharing of revenue and expenditure. Because Asian cities will need huge amounts of funding for infrastructure and urban renewal, municipal bond markets will have to be nurtured within Asia to provide that funding. This requires transparent accounting by cities.  

In Jakarta this month, a new governor and deputy governor from outside the city were elected to transform the urban sprawl of Indonesia’s capital into a 21st-century powerhouse.   

Cities have become the new arena of global competition for people, ideas and prosperity.

 

Andrew Sheng is president of the Fung Global Institute.