Cities make the wealth of nations

 By Razeen Sally For The Straits Times

 ADAM Smith called it the wealth of nations. Two centuries later, we talk about "national competitiveness". The World Economic Forum's annual Global Competitiveness Report, for example, identifies the policies and institutions that boost national productivity, which determines competitiveness and economic growth.

Perhaps we should also focus on cities. More than ever, cities - especially existing and aspiring "global cities" - are the lifeblood of the global economy. The competitiveness of cities - what makes them more productive and successful - increasingly determines the wealth of nations, regions and the whole world.

But the competitiveness of a city does not stand in isolation. Cities are still linked to their immediate hinterlands and embedded in their nations. In other words, the competitiveness of a city and the nation of which it is a part are intertwined and mutually reinforcing.

The map of the global economy most of us have in mind is one of nation states connected to each other via trade and the movement of capital, people and technology. That is still highly relevant. But throughout history, the most intensive cross-border economic transactions have been between cities - mostly cities located on coastlines.

It is therefore useful to think of a different map of the global economy: one of cities connected across land borders, seas and oceans through the exchange of goods and services, foreign investment, workers and border-hopping technologies.

Unprecedented levels of urbanisation make this city-based map especially relevant. Three years ago, for the first time in history, over half the world's population lived in cities. Urban areas also account for over 80 per cent of global gross domestic product (GDP). According to McKinsey Global Institute, as of 2007, 1.5 billion people (22 per cent of the world's population) lived in the world's 600 most populous cities and accounted for a GDP of US$30 trillion (S$37.6 trillion) - well over half the global GDP. The top 100 cities, with a GDP of US$21 trillion, accounted for 38 per cent of global GDP.

In 2025, McKinsey reckons that the top 600 cities will have 25 per cent of the world's population and nearly 60 per cent of global GDP.

What does this mean for the "competitiveness of cities" and the "wealth of nations"?

Most productive policy innovation is happening in cities and sub-national regions. It is not happening at the level of national governments or in international forums like the United Nations, the European Union and the G-20. Policymaking is more flexible and practical the closer it is to the citizen. Cities often emulate each other and adopt best international practice better than nations do.

This is even true of cities and state governments in the United States at a time when politics in Washington, DC, remains gridlocked. In the EU, national governments and EU institutions are stuck in sclerotic political cartels with failed policies. Can Europe's cities break out of this straitjacket and unleash long-delayed reforms?

Perhaps. But this century's story of cities and the wealth of nations will more likely be scripted in the emerging world - outside the West. Asian cities, stretching from India to China and North-east Asia via South-east Asia, will be the main players. McKinsey's list of the top 600 cities contains 220 from developing countries. But it estimates that, by 2025, 136 new cities will join this list - all from developing countries. Of the new entrants, 100 will come from China alone.

What are the ingredients that make cities more productive? Some vital municipal policies are parochial: urban planning and zoning, housing, water, sanitation, policing and so on. But the most successful cities, like the most successful nations, also have stable public finances; low, simple and competitive taxation; and transparent business regulations. They are also characterised by strong and impartial rule of law, openness to trade and foreign investment, and a welcoming environment for foreign talent. Other factors include good "hard connectivity" - roads, transit systems, ports and airports; and good "soft connectivity" - education, skills and technology diffusion.

Like nations, cities with limited - but effective - government and competitive markets do better than cities with big, inefficient government and distorted markets. This reinforces the message that there is a good deal of overlap between city competitiveness and national competitiveness.

My role models are Hong Kong and Singapore. Both regularly top the rankings of the Global Competitiveness Report, the World Bank's Doing Business Index and the Simon Fraser Institute's Economic Freedom of the World Index.

Government is relatively small, clean and efficient, and markets are relatively competitive and highly globalised. Nowadays, Hong Kong and Singapore are the logistics and services hubs for Asian trade. Modern global supply chains plug them into other cities in Asia and beyond.

These two cities may be exceptions, but they have set the standard for other Asian cities to follow.

To me, free markets and free trade produce a virtuous trinity:

They promote growth and prosperity - the economic imperative.

They expand individual freedom - the moral imperative.

Cities, more than anything else, sustain peaceful international relations - the geopolitical imperative.

I think of cities in this context. They might indeed be the best available political-economic units to promote prosperity, freedom and peace - better perhaps than nation states, and certainly better than most mechanisms of global governance.

stopinion@sph.com.sg

The writer is visiting associate professor at the Lee Kuan Yew School of Public Policy, National University of Singapore, and chair of the Global Agenda Council on Competitiveness of the World Economic Forum.