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Global macro & geopolitics from a small economy perspective

The importance of cities

David Skilling
8 June 2011

Policy-makers are used to thinking about countries and groupings of countries. But increasingly we should think about cities. For one thing, over 50% of the global population now live in cities. And 100 cities account for about 30% of global GDP. So cities matter, and cities – for the most part – are a positive force. Ed Glaeser [in ‘The Triumph of the City’, 2010, which is well worth reading] notes the efficiency and innovative properties of cities. This is a rich vein of literature; Peter Hall’s ‘Cities in Civilization’ is a classic in this regard, and there is much excellent academic material on the roles of cities.

One of the questions I have been thinking about is how this affects the ‘unit of analysis’; when should we use nations as the right unit of analysis, and when do other units like cities or regions become important? Historically, cities were primary nodes of global commerce and growth – and some argue that we are moving back to a world dominated by cities (e.g. Parag Khanna here and also in his books). I think this is directionally right – cities account for a growing share of population, GDP, innovation, and so on – even if it is not quite clear to me how far this process will run. But this process does raise a few nearer-term questions for policy-makers in developed countries to consider:

Who are we competing with?
It is not simply country v country competition for labour, firms, and capital. Although national level policy settings are relevant (tax rates, regulation etc), it is really cities that are competing to attract the capital and talent that support growth. For example, in finance it is New York, London, Geneva, Hong Kong, Singapore, and perhaps a few others, who compete. And more generally, people make location decisions about cities as much as they choose between countries. Richard Florida’s ‘Flight of the Creative Class’ (and in other of his books) notes the characteristics in cities that appeal to creative talent, broadly defined. The performance of cities is an increasingly important driver of national competitive advantage, and so the quality of decision-making in cities matters beyond the city limits. This suggests that the relevant measure of competitiveness may not be traditional national-level measures as captured by, for example, the World Economic Forum. We perhaps need new measures to capture competitiveness between cities, and we may also need to broaden out the range of indicators, to supplement the national benchmarking of economic performance and the business environment. As one (non-scientific, but interesting) example of this, Monocle Magazine have recently established an annual qualify of life index that ranks cities on a range of measures. The latest survey is just out, with Helsinki ranked as #1 [more detail available at ]

Where are the good ideas coming from?
I think that small advanced countries are interesting because, among other reasons, they tend to lead on innovation. And I think the same is true of many cities as well. Indeed, on some big global issues cities are leading the charge (e.g. the C40 group of cities are doing interesting work on climate change). Interesting policy ideas are still obviously developed in national capitals, but increasingly we might want to keep an eye on the way in which cities (and other sub-national units) are innovating to address policy challenges. Ed Glaeser, in the book referenced above, talks a lot about the innovative capacity of cities – this is true in the commercial space, and also I would argue in terms of policy. Sydney and New York generate good policy ideas as well as Canberra and Washington. Governments should be engaging with and monitoring cities for examples of policy innovation, as well as national capitals.

Who do we need to be developing relationships with?
Because of their growing economic and political (and policy) significance, it is important to be developing relationships with key cities even when they are not the national capital. Relationships with New York, Shanghai, and Mumbai are important for example. The economies and politics of these cities are often quite distinct from that at national level. In addition to the big well-known mega-cities, there is another tier of cities (say the next 600) that are growing rapidly in terms of GDP and population, and with whom relationships may need to be built over time. A recent McKinsey Global Institute report describes the profile of these ‘middle-weight’ cities ( Overall, the economic and political role of cities is likely to change, and governments should be responsive to this – both in terms of investing in economic relationships (e.g. the location of trade promotion offices) and potentially in terms of building new G to G relationships.