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Once a source of economic dynamism, megacities risk becoming a drag on growth

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Productivity in Latin America

City limits

Once a source of economic dynamism, megacities risk becoming a drag on growth

 

Aug 13th 2011 | from the print edition

 

They could all be working instead

 

FOUR out of five Latin Americans live in cities, compared with fewer than half of Asians or Africans. The region’s 198 biggest cities—those with more than 200,000 people—account for 60% of its economic output, with the ten largest alone generating half of that. The productivity gains that flow from bringing people together in cities have been one of the drivers of economic growth in Latin America over the past half century or more. But congestion, housing shortages, pollution and a lack of urban planning mean that Latin America’s biggest cities now risk dragging down their country’s economies, according to a report* by the McKinsey Global Institute, the research arm of McKinsey, a firm of management consultants.

 

Until the 1970s, Latin America’s big cities led their countries’ economic development. São Paulo saw annual economic growth of 10.3% from 1920 to 1970 and Rio de Janeiro of 7%, both faster than the 6.8% notched up by Brazil as a whole over that period. But in the decade to 2008 São Paulo’s output grew only two-thirds as fast as Brazil’s, whereas Rio de Janeiro managed a pitiful 37% of the national average. Of the nine cities with the biggest economies, only Lima, Mexico City and Monterrey saw economic growth in this period that was above their countries’ norms.

 

Some medium-sized cities—such as Curitiba and Florianópolis in Brazil, Toluca and Mérida in Mexico and Medellín in Colombia—are starting to show more dynamism than the urban behemoths. That is partly the healthy consequence of liberal economic reforms in the 1980s and 1990s: the previous policies of state-led import-substitution tended to concentrate economic activity close to the centres of political power. But McKinsey expects this trend to continue. It reckons that over the next 15 years most of the top ten cities will display below-average growth in population and output (one exception will be Rio de Janeiro, boosted by investment in offshore oil as well as the Olympic games of 2016). But other big and medium-sized cities will grow faster than the national average.

 

Unusually early in their development, Latin America’s biggest cities may have ceased to reap economies of scale “because their institutional, social and environmental support structures have not kept up with their expanding populations,” McKinsey argues. Put more bluntly, the problem is that they are “congested, poorly planned and dangerous”.

 

Latin America’s overall record of productivity growth is poor, thanks to a toxic mixture of burdensome regulation, a large informal economy and a lack of innovation. Given the cities’ economic weight, it is not surprising that many of the region’s wider problems are reflected there. Compared with their peers in developed countries, Latin America’s top ten cities are unsafe, suffer endemic housing shortages, poor schooling and weak health services. They are also inefficient in their energy use and waste management.

 

For example, every dollar of GDP generated in Chile’s capital, Santiago, requires 60% more energy than a dollar of GDP generated in (much colder) Helsinki in Finland. McKinsey reckons that Bogotá needs to double its housing stock by 2025. Overcoming Latin America’s housing shortage and supplying its urban population with associated services (sewerage, water, gas and electricity) would require investment of $3 trillion by 2025.

 

If cities are exacerbating, rather than mitigating, national ills, this may be because of a lack of urban planning. Unplanned sprawl leads to a shortage of green space, strains transport systems, and makes it hard for businesses or housing developers to find sites. All this is harder still when cities expand beyond their political boundaries, creating problems of co-ordination (Mexico City is split between the Federal District and the surrounding State of Mexico, for example). But the report also highlights some success stories. In both Monterrey and Medellín, public authorities have worked closely with the private sector to foster innovation.

 

Along with land use, transport is the biggest headache facing city authorities. Vehicle ownership is likely to expand by 4% a year over the next 15 years, further clogging the streets. Curitiba stands out as an exception: 54% of journeys there are by public transport. The city’s pioneering bus rapid-transport system has been copied across the region—in Bogotá, Mexico City and Lima. In Bogotá the number of daily public-transport journeys is equal to 75% of the population, whereas in Santiago this number is only 50%.

 

More is needed. Experience in Europe and Asia shows that public authorities can increase the efficiency of goods distribution in cities by getting private firms to share their lorries. And although metros are expensive, the cost of not having them may soon be even greater.

 

* “Building globally competitive cities: The Key to Latin American Growth”. McKinsey Global Institute, 2011.

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Cities seem to have a natural limit of about 1 million people. Beyond that it seems just too expensive and/or difficult to maintain proper infrastructure, and below that, too low of a population to have a dynamic and diverse economy.

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