Cities have long been the world’s economic dynamos, but today the speed and scale of their expansion are unprecedented. Through a combination of consumption and investment in physical capital, growing cities could inject up to $30 trillion a year into the world economy by 2025. Understanding cities and their shifting demographics is critical to reaching urban consumers and to preparing for the challenges that will arise from increasing demand for natural resources (such as water and energy) and for capital to invest in new housing, office buildings, and port capacity.
A new report from the McKinsey Global Institute, Urban world: Cities and the rise of the consuming class, finds that the 600 cities making the largest contribution to a higher global GDP—the City 600—will generate nearly 65 percent of world economic growth by 2025. However, the most dramatic story within the City 600 involves just over 440 cities in emerging economies; by 2025, the Emerging 440 will account for close to half of overall growth. One billion people will enter the global consuming class by 2025. They will have incomes high enough to classify them as significant consumers of goods and services, and around 600 million of them will live in the Emerging 440.
The world’s center of economic gravity has changed over past centuries. But since the mid-1980s, the pace of that shift—from the United States and Europe toward Asia— has been increasing dramatically (exhibit). We expect this trend to continue, so executives and policy makers must be prepared to respond.
To capture the opportunities that arise from urbanization, businesses will need extensive market intelligence. Many of the Emerging 440 middleweights aren’t widely known outside their own nations. Income and demographic trends vary from country to country and city to city, and the consumption of different products and services starts to rise at different income levels. Armed with detailed information about relevant urban markets, companies need to allocate resources proactively and aggressively to capture the opportunities. Companies that understand and respond to shifting urban marketplaces are likely to experience tremendous benefits. Yet a new McKinsey survey finds that less than 20 percent of executives are making location decisions at the city level.
Policy makers have a different set of challenges. In the developing world, the task is to manage growth in a way that avoids diseconomies of scale and creates the basis for sustainable economic performance. In the developed world, the goal is to maintain a healthy rate of growth through higher productivity, new business investments, and enhanced links with emerging regions.