The world is in the throes of a sweeping population shift from the countryside to the city. Underpinning this transformation are the economies of scale that make concentrated urban centers more productive. This productivity improvement from urbanization has already delivered substantial economic growth and radically reduced poverty in countries such as China. The growth of cities has the potential for further growth and poverty reduction across many emerging markets.
However, we are now seeing cases where the growth rates of some large cities have begun to slow. In addition, the increased complexity of large size can overwhelm the ability to manage. When this happens, cities can become disastrous mixtures of slums and gridlock, raising the question of whether there is a maximum size for a workable city. The view of the McKinsey Global Institute (MGI) is that there is, in theory, no limit set by technology or infrastructure to how big or how fast cities can grow — but only if business and government leaders are able to manage the increased complexity that comes with bigger city size.
Managing the opportunities and challenges of cities is both vital and urgent as global urbanization rushes ahead on a dramatic scale. The share of the world’s population living in cities has recently surpassed 50 percent. By 2025, we see another 1.2 billion people swelling those ranks—95 percent of whom will live in developing countries. The reasons for this rise in growth are not hard to fathom. Urbanization has been a cornerstone in the economic development of countries. South Korea’s economic miracle—an increase in real GDP per capita of more than ten times since 1960—was enabled by a surge in the urban population from around 25 percent to 80 percent of the total population. Urban centers foster the growth of higher-productivity jobs and industries and reduce the cost of delivering basic services. MGI research suggests that clean water and education, for example, can be delivered for 30 to 50 percent less in Indian cities than in rural areas. Urbanization also helps rural areas. The decline in rural population as a result of urban migration allows rural areas to improve productivity, which in turn raises rural income.
Does this imply that the future will be one of massive megalopolises spread across the globe? Theoretically, the answer is yes—there is no limit to the size of cities. In practice, however, the growth of most urban centers is bound by an inability to manage their size in a way that maximizes scale opportunities and minimizes costs. Large urban centers are highly complex, demanding environments that require a long planning horizon and extraordinary managerial skills. Many city governments are simply not prepared to cope with the speed at which their populations are expanding.
Already there are plenty of examples of dysfunctional cities across Africa, Asia, and Latin America. Without skillful management, cities become centers of decay, gridlock, crime, urban sprawl, slum housing, and pollution. The quality of life deteriorates and economic dynamism falters—scale diseconomies outweigh scale benefits.
These challenges are most acute in the megacities—cities with more than 10 million inhabitants. The world will see the number of megacities rise from 23 today to 36 in 2025. Some cities such as São Paulo and Shanghai could have GDP in excess of $500 billion by 2025, more than the GDP of Belgium or Switzerland today.
Latin-American megacities are already running out of steam. Mexico City and São Paulo have both run into constraints. As urban centers have expanded, they have “swallowed up” smaller neighboring towns—but these towns have remained outside the larger city’s jurisdiction. Fragmented political boundaries have diluted management responsibilities among mayors (often in multiple municipalities), state governments, and federal agencies. Planning and policy too often have not been coordinated among these players and typically don’t look far enough ahead. Ineffective local funding mechanisms resulting in infrastructure shortfalls and the growth of slums have only compounded these governance issues.
However, the decline of weakly managed large cities is neither inevitable nor irreversible. Cities can move decisively to tackle infrastructure gaps, improve planning, and foster high-productivity jobs. There are four principles of effective city management that urbanizing regions need to firmly establish. First, successful cities need sufficient funding to finance their running costs and new infrastructure. Sources of funding could include monetizing land assets and levying property taxes, sales taxes, or user charges. Second, cities need modern, accountable governance; many large successful cities, including London and New York, have opted for empowered mayors with long tenures and clear accountability. Third, cities need proper planning that spans a 1- to 40-year horizon. Finally, all cities should craft dedicated policies in critical areas such as affordable housing.
Regions that are not able to deliver against these principles should, where possible, shape the profile of urbanization. Urban migration that is dispersed across many cities rather than focused on a few is likely to be easier to manage and result in less stress for the biggest metropolitan areas. The good news is that much of the world’s urbanization will happen outside the megacities. While megacities will contribute around 10 percent of global economic growth over the next two decades, it is the “middleweight” cities (rapidly growing cities with population below 10 million) that will deliver the lion’s share of global growth. MGI research suggests that around 575 middleweight cities will generate roughly half of global growth.
Urbanization is an inexorable global force, powered by the potential for enormous economic benefits. We will only realize those benefits, however, if we learn to manage our rapidly growing cities effectively.
