Financial Times

Middleweight cities to animate global growth

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Even Western executives who are good at geography may have a hard time picking out Surat, Foshan and Porto Alegre on a map. Yet over the next decade, each of these cities will contribute more to global economic growth than Madrid, Milan or Zurich.

While China’s move to cut interest rates this month has sparked some concern about emerging-market growth, we see no let-up in one of the most disruptive trends of our time: the shift of the world’s center of economic gravity from advanced economies to the developing world, and in particular, to rapidly growing cities in Asia, Latin American and Africa. Even at 6 to 7 per cent growth, China is adding the equivalent of a Canada to the global economy every two years.

We are currently living through the biggest mass migration from countryside to cities in human history. The global population of cities is growing by 65m people annually – that’s the equivalent of 7 Chicagos a year, every year. Between now and 2025, we calculate that 440 cities in developing countries will generate nearly half of global GDP growth.

Surat, Foshan and Porto Alegre are three of them. Surat, 180 miles north of Mumbai, accounts for about two-fifths of India’s textile production. Foshan, on the Pearl River in Guangdong Province, is China’s seventh largest city in terms of GDP. Porto Alegre is capital of the fourth largest state in Brazil. All three have fast-growing populations, with a rapidly expanding base of consumers.

Yet places like these are being overlooked by most Western businesses, whose prime emerging-market focus to date has been megacities such as Shanghai or Mumbai. Today, business leaders need to reset their intuition about economic geography, or risk missing one of the key sources of future growth.

It is the “middleweights” that frequently offer the best opportunities. In Brazil, for example, Sao Paulo state has a GDP larger than Argentina’s but competition there is brutal. New entrants to the Brazilian market might be better off in the northeast, Brazil’s populous but poorest region, where boomtowns like Joao Pessoa and Natal are growing 50 per cent faster than the national average.

The notion that smaller cities can offer bigger opportunities isn’t exactly new: think Wal-Mart, which opened its first store in Rogers, Arkansas, and built one of the world’s largest businesses by avoiding highly competitive metropolitan markets. Yet in our experience, most Western executives still make decisions at the country rather than the city level.

Since the 1980s, the population of cities globally has been rising every year by an average of 65m people, the equivalent to the population of the entire UK. Much of this rapid urbanisation has taken place in two countries — China and India, where urbanisation helped lift one billion people out of extreme poverty between 1990 and 2010.

By 2025, we expect a further two billion to join the global consuming class, pushing consumer spending in emerging markets to $30tn per year by 2030, up from $12tn in 2010.

Cities, of course, have more than their share of problems, from pollution to congestion to slums, and most are unprepared for the influx of millions of new residents from rural areas. Yet people flock to them because that is where money and opportunity are.

Dense population centers build wealth because they generate productivity gains through economies of scale, specialisation of labor, knowledge spillovers and trade. These gains in productivity are amplified through network effects as buyers and sellers, suppliers and customers, employers and workers interact.

As a rule of thumb, every 20 per cent increase in a country’s urbanisation rate doubles the income per person as urbanisation drives higher productivity and innovation. Urban consumers spend more than rural ones, and it’s the generation in their 20s and 30s that will drive the future growth of emerging market cities, confident their incomes will rise and with high aspirations.

Yet companies are ill-prepared. Surveys show that about three-quarters of senior executives believe their organizations need to develop global-leadership capabilities, but that less than 10 percent think they are currently doing so very effectively. About one in three US companies say they haven’t exploited international opportunities sufficiently because they have too few people with international competencies. They could start by hiring people who can find Surat and Foshan on a map.

This article originally ran in Financial Times.