The Economic Structure of Dynamic Mega-cities

1. The Economic Structure of Dynamic Mega-cities By Shahid Yusuf World Bank February 4th 2009

2. Kinds of Mega-Cities • Post-Industrial: have experienced a hollowing out of industry and are now focused on services – e.g. New York, Hong Kong, Rio de Janeiro etc. • Industrial: industry, especially manufacturing remains the principal driver, however, share of services is rising – e.g. Shanghai, Sao Paulo, Seoul Capital Region. • Pre-Industrial: dependent upon low value services, the informal sector, government services, and nascent industrial and business services sectors – e.g. Dhaka, Karachi, Lagos etc.

3. Post Industrial Cities • Slow growing, heavily reliant on FIRE, sprawling, many with ageing infrastructure, and unequal income distribution. • Limited prospects of reversing industrial hollowing. • Few such cities spawning new growth industries. Are often constrained by the legacy of past actions, the unavailability (or high price) of land for new activities, zoning laws and other regulations. • Future lies in augmenting and leveraging human capital; accessing financing for new initiatives; more efficiently and flexibly utilizing land/fixed assets. And sustaining the innovativeness/competitiveness of finance/business services.

4. Industrial Cities • Bright medium term growth prospects. Need to emphasize technological capabilities so as to promote growth through catch-up; the continual upgrading of infrastructure, including IT; and the planning and governance of an increasingly complex, polycentric, multi-jurisdictional urban region. • Such mega-cities must guard against the premature exodus of manufacturing activities and on putting all their bets on business services. The latter are unlikely to fuel rapid growth. • Other priorities: containing sprawl, energy intensity, and of institutions (e.g. related to land use) which affect the capacity for renewal; measures to enlarge fiscal/financial resource mobilization capacity; improving livability.

5. Pre-Industrial Cities • Industrializing too slowly, still relying on labor intensive light industries, and lacking strong new drivers. • Because of institutions constraining better land use, weak infrastructure and poor business climate, these cities caught in low level traps. Not benefiting from agglomeration economies, and not attracting FDI into manufacturing (e.g. Karachi, Mumbai). • Slums and lawlessness compounding problems (e.g. Lagos). • Urgent need for leadership; good planning, political will/support and consistent long term policies to tackle social/institutional issues; and significant infusions of capital to narrow infrastructure gaps.

6. Future of Mega-Cities • Post –industrial cities must diversify out of mono-sectoral services economies or risk further weakening of ‘urbanization economies’, innovation capabilities, and of their growth momentum. Financial services/tourism need to be complemented by other activities. • Industrial cities should aim for balanced economic structure and sustain agglomeration economies. • Pre-industrial cities through reforms of governance and institutions must create the spaces for industrial diversification and upgrading.

7. Future of Mega-Cities • Such cities, at all stages of development, have great potential but many are not exploiting it fully, and some risk losing it.