Asia’s growth engines need a tune up
Asian cities act as engines of economic growth, providing jobs, expertise, and the sharing of resources. But in some cases, these powerful engines are sputtering due to insufficient infrastructure, inadequate planning, and poor governance.
The urbanization process under way in developing countries in Asia portends well for regional economic prospects. Cities in these countries play a central role in driving economic growth and generating jobs. They are the centers of structural transformation and innovation, where more productive firms, better-paying jobs, and key institutions and amenities are located.
Several mechanisms are behind the economic and social benefits that cities confer. First, there is better matching between input and output markets. For example, firms can find the most suitable workers, and workers can also find the most rewarding jobs that match their skill sets. Secondly, learning from other firms and workers is easier because information and ideas are exchanged with a fluidity and speed that is not possible in sparsely populated places. In Sialkot, Pakistan, small soccer ball firms take their cue from bigger firms on design, management, and technology instead of spending resources themselves on gathering market information. Third, the clustering in cities facilitate sharing of resources among different sectors. Law firms specialized in intellectual property in Bengaluru, India provide services for software companies as well as biotechnology companies.
In addition, the physical concentration of households and firms allow key infrastructure to be provided more efficiently. The per capita investment cost of infrastructure both hard such as roads and electricity, as well as soft like police and social services, declines dramatically as population density increases.
Evidence from over 20,000 firms in 488 cities across 25 developing countries in Asia from 2012 to 2016 shows that on average, firms in larger cities have higher labor productivity and consequently pay their workers more. Recent labor force surveys in India, Indonesia, Pakistan, and the Philippines show that big cities pay workers with similar demographic and education profile by 7% to 20% more when they are in big cities rather than in smaller cities. Moreover, the wage advantage of big cities is observed across the wage profile. This means that low and high skilled workers are all more productive in big cities. Firms in bigger cities tend to be more productive as well.
However, the link between urbanization and economic dynamism is not automatic, especially in developing countries. The speed with which urbanization unfolded in the region has often meant a lack of coordinated plan for urban expansion. This often translates into insufficient infrastructure and its consequences such as congestion and a large informal sector where access to basic services is particularly problematic. Without adequate transport and decent housing, workers are unable to find jobs that will reward them the most. Similarly, poor governance, such as excessively inflexible land-use regulations can obstruct firms’ business operations. Indeed, insufficient infrastructure and local business regulations are among the biggest obstacles to businesses in developing countries in Asia, especially in smaller cities.
Finally, the kinds of activities in a city matter. Cities born out of extractive resource industries are primarily built around consumption activities and tend to generate low value non-tradeable services. They usually fail to take off as engines of job creation and growth. In contrast, the manufacturing sector has been documented to create better quality employment and economic base from which other industries grow. Some experts argue that it is harder for cities in today’s developing countries to develop comparative advantage in the tradeable manufacturing sector.
Declining trade costs in the last century mean that cities in the developing world compete with many more cities around the world in the production of goods and services. It therefore bodes well that many big cities in the region continue to have a sizeable manufacturing sector. For example, the big cities in India, Indonesia, Pakistan, and the Philippines have the largest employment shares in the manufacturing sector, ranging from 12% to 27%.
While Asian cities differ in terms of the kinds and severity of challenges they face, a guiding principle is that they need to function well as labor markets. In practice, this requires that within-city travel is fast and cheap, firms and households have the flexibility to relocate from one part of a city to another, and real estate is affordable.
This has implications for urban planning, land-use regulations, the provision of transport infrastructure, as well as policies that contribute to the affordability of decent housing. Aside from helping cities harness their full potential as engines of growth and job creation, these policies are also at the heart of making cities an instrument of social inclusion.
This blog post is based on research in the publication Asian Development Outlook (ADO) 2019 Update: Fostering Growth and Inclusion in Asia's Cities