Catalyzing 21st Century Growth : The Role of Innovative Cities

1. Catalyzing 21st Century Growth: The Role of Innovative Cities May 8, 2012 | 10:00 AM EST Speaker: Shahid Yusuf Economic Advisor World Bank Institute

2. Why do Cities matter for Growth Economics? • High rate of urbanization and secular trend because of “urban edge” in productivity and labor saving technological bias in agriculture. • Growing sectors are manufacturing and services, both urban based. • Increasing share of GDP sourced from urban areas. • Productive activities concentrated in few large cities e.g. Seoul, Bangkok, Cairo, Karachi, Sao Paolo.

3. Sources of Growth • Supply based growth estimated through production functions: capital, labor and total factor productivity (TFP). For low and middle income countries, capital and TFP are the principal and complementary sources of growth (however, one must not ignore labor). • Demand based growth derived from: consumption, investment, and net exports. • Fast growing economies – national or local – rely on supply push that is supported by demand pull. The two must work together.

4. Deconstructing (supply-side) Sources • Capital accumulation requires an enabling environment (national and local), entrepreneurship, and institutions for mobilizing (from internal and external sources) and efficiently channeling funds into productive uses in an urban milieu. • Productivity of labor depends upon supply of (and technological level of) capital equipment. • Gains in TFP function of allocative efficiency of state and markets, R&D, innovation, volume and quality of skills, management and technology absorption.

5. Deconstructing the Demand-Side • Stable national-level macro-environment that smoothens cyclical fluctuations, contains inflationary pressures and minimizes risks from bubbles. • Expanding middle class (an urban phenomenon) that provides steadily growing consumption demand for standardized commodities and new products. • Culture and institutions encouraging entrepreneurship and enforcing property rights, thereby encouraging investment. • Trade and FDI policies supportive of openness and that promote exports. An open trading environment attracts FDI and stimulates exports.

6. Enter Cities • Success of supply and demand side drivers of growth depends upon urban response to policies, market inducements and to opportunities. Agriculture a small and shrinking share of national product. • For most countries, GDP growth derives from performance of a few major cities. Recent trends and growth dynamics suggest that this concentration in the urban sources of growth will increase.

7. When is a city an “engine of growth?” • “Engines” must account for a large share of GDP. • Size confers agglomeration and scale economies and contributes to innovativeness. • Industrial composition and diversity contributes to growth, its stability and exports. • Share of high-consuming middle class greater in large, industrially diversified cities. • “Engines” deliver stable, sustainable growth.

8. Other Attributes of “Engines” • Engines are frequently capital cities and enjoy other geographical and historical advantages. • Growing “engines” house major universities and research entities, and accumulate labor and deep pools of skills from national and foreign sources. • Financial institutions concentrate in large cities • “Engines” attract FDI that contributes to industrial diversification and technology transfer. • “Engines” are open, internationally connected, exporting cities. • Large cities have broader tax bases and can mobilize more revenue to finance infrastructure and services.

9. Lifecycles of “Engine” Cities: Stage 1 • Historically engines have started out as industrial centers and providers of administrative services (e.g. European engines). • In earlier stages, they absorb labor and capital from rural sector into more productive activities. • Fast growing engines rely on growth of manufacturing sector, and serve as trade and financial hubs (e.g. London, New York, Zurich).

10. Lifecycle: Stage 2 • In maturing engines, manufacturing is superseded by producer services and creative industries however, manufacturing remains important source of employment, innovation and TFP (e.g. Seoul). • Innovation more broadly (including of services) acquires greater salience. • Exports remain an important driver of growth and of spillovers. • These cities continue to increase share of population and to attract skills and FDI (e.g. Tokyo). • ICT and transport infrastructure supporting connectivity has a larger role.

11. Notable (new) Engines • Ho Chi Minh City, Shenzhen, Singapore and Seoul are four cities that highlight key attributes of engines. • Their emergence as engines is relatively recent: in the 1960s for Singapore and Seoul, in the 1980s for Shenzhen, and the 1990s for HCM City. • Location was key in all four cases, two were/are capitals/administrative centers.

12. Ho Chi Minh City • Population (2010): 7.4 million (3 million in 1989) and increasing • GDP (2010): $24 billion (approx) • GDP growth 2000-2009: 10% approx. • GDP share (2010): 20% • Share of manufacturing: 30% • Share of exports: 40% • Share of FDI: 35% ($12.2 billion stock) • Internet penetration:2.2 million subscribers and 5.5 million users

13. Shenzhen • Population rose from 50,000 in 1979 to 10.3 million in 2010 • GDP growth 15+ percent 2005- 2009 • GDP 2010: $141 billion+ • Export/GDP ratio: 1.45. China’s leading export city • FDI stock 2010: $30 billion • R&D/GDP in 2010: 3.4% • Transport hub: 4th largest container port in 2010 • Internet penetration rate (2011): 78%

14. Singapore • Population rose from 650,000 in 1960 to 5 million in 2010 – 1.4 million were foreigners • GDP growth 2000 – 2010: 6.6% • Share of manufacturing in GDP: 22% • Export/GDP consistently high (2010): 1.58 • FDI (2010): $618.6 billion • R&D as percent of GDP: 3% • Major transport hub: 2nd largest container port 2010 • Internet usage (2010): 78% of population

15. Seoul • Population 2010: 9.8 million (metro area 22.5 million) • GDP (2008): $291 billion (city share about 24%; metro area share of GDP is 48%) • GDP growth 2000- 2009: 4-5% approximately • Share of secondary industry in GDP (2003): 14% • Export/GDP • Skilled workforce: 50% have some tertiary education • R&D as percent of GDP (2005): 3.14% of GDP • Seoul/Incheon air transport hub (2010): 8th by international passenger traffic; 4th by world cargo traffic • Internet penetration (2010): 83%

16. The Future of Engines • First mover, scale and agglomeration advantages can be enduring if supported by good governance/metropolitan management. • Innovation capacity advantages likely to strengthen – but most innovation will be incremental. • Can take the lead in greening growth, containing energy intensity (especially of urban transport) and introducing/producing new green technologies, products and services. • Urbanization economies, skill concentration facilitates diversification, buttresses export intensity.

17. Bibliography • Edward Glaeser, 2011. Triumph of the City. New York, Penguin Press. • Margaret Pugh O’Mara, 2005. Cities of Knowledge. Princeton NJ, Princeton University Press. • Robert P. Inman, 2009. Making Cities Work, Princeton NJ, Princeton University Press. • Joan Fitzgerald, 2010. Emerald Cities. New York, Oxford University Press. • John D. Kasarda and Greg Lindsay, 2011. Aerotropolis. New York, Farrar Straus and Giroux. • John Montgomery, 2007. The New Wealth of Cities. Aldershot, Ashgate Publishing.

18. Thank You