Emerging cities are creating new consuming class (1)

This shift is driven by the rapid growth of robust emerging market economies (EMEs), as depicted by the spectacular rise of China, in contrast to the tepid growth of crisis-prone developed economies. We are also witnessing a global wave of mass urbanization, a similar and related transformation, with its own profound economic and political implications, as the world population, especially in the EMEs, shifts from the countryside to towns and cities.

Urbanization, benefiting from demand side economies of scale (positive network externalities) as well as supply side economies of scale, enhanced by economies of agglomeration (cluster effects), is one of the most powerful drivers of global productivity increases and economic growth. (see Chapter 4 of “Scale Economies and Agglomeration” of the World Bank's “World Development Report 2009: Reshaping Economic Geography” for an excellent analysis). Over the last century, the urbanization rate and per capita GDP have increased in tandem. Urbanization is also the creator of a new wave of consumers with increasing disposable incomes that enable them to buy more than the basic necessities. That is why the 21st century is often referred to as the century of the cities, highlighting their importance as economic growth poles.

Today, for the first time in history, more than half of the world population lives in towns and cities, generating more than 80 percent of global GDP. According to the United Nation's “2011 Revision of World Urbanization Prospects,” released last April, the percentage of the world urban population is projected to rise from 52 percent in 2011 to 60 percent in 2030 and 67 percent in 2050. Future urban populations will increasingly be concentrated in large cities of at least one million inhabitants. Megacities (populations over 10 million) will experience the largest percentage increase. Their numbers will rise from 23 in 2011 to 37 in 2025, their share of the world urban population increasing from 9.6 percent to 13.6 percent.

Turkey has achieved a higher level of urbanization than the global average, more like a developed country than a developing country, with the percentage of the urban population rising from 24.8 percent in 1950, to 43.8 percent in 1980 and 70.5 percent in 2010. The percentage is projected to be 81.2 percent in 2025. The population of İstanbul, Turkey's only megacity and ranked 18th on the list of 23 megacities headed by Tokyo, rose from 2.8 million in 1970 to 6.6 million in 1990 and 11.3 million in 2011. The population is projected to hit 14.9 million in 2025, still ranked 18th on the list of 37 megacities, and still headed by Tokyo. Although much of Turkey's earlier urbanization occurred in the northwestern and western regions, later urbanization spread throughout the country, as evidenced by the scores of emerging cities, such as Konya and Gaziantep, inhabited by Anatolian Tigers, the rising class of Turkish entrepreneurs.

Against this background, McKinsey Global Institute (MGI), the business and economics research unit of the consulting firm McKinsey & Company published last week the 92-page study “Urban World: Cities and the Rise of the Consuming Class.” It is the latest of several MGI studies since 2008, focusing on urbanization and the role of cities in the global economy, reflecting their primary importance as a core research area for the MGI. It updates the “Urban World: Mapping the Economic Power of Cities” published in March 2011. Based on the MGI's Cityscope 2.0 database of demographic, income, and household trends at a granular level in 2,657 cities worldwide, the latest report, which projects the global demographic and economic evolution of cities during 2010-2025, builds on and synthesizes the MGI's regional research on cities, such as “Building Globally Competitive Cities: The Key to Latin American Growth.”

According to the MGI study, which calls the global wave of mass urbanization “the most significant shift in the earth's economic center of gravity in history,” the top 600 cities, called the City 600, will generate 65 percent of world economic growth by 2025. But just over 440 cities in the EMEs, called the Emerging 440, from the City 600, will contribute 47 percent of overall growth.

One billion people, 600 million from the Emerging 440, will join by 2025 the global consuming class, defined as individuals with a disposable income of more than $10 a day at 2005 purchasing power parity, as significant consumers of discretionary goods and services. The Emerging 440, which will account for 60 percent of the new consuming class, includes 20 megacities, such as İstanbul, Lagos, Mexico City, Moscow, Sao Paulo, and Shanghai, whose 7.6 percent estimated compound annual GDP growth is double that of global GDP. But more than 400 of the Emerging 440 are middleweight cities (populations between 200,000 and one million) whose estimated 8 percent growth rate is even higher. They will account for two-thirds of worldwide GDP growth by 2025. China, the most rapidly urbanizing EME, alone accounts for 242 of the Emerging 440, of which 236 are middleweights. Chinese cities by themselves are expected to contribute 28 percent of global GDP growth.

My next column will conclude the discussion on the MGI study, focusing on its implications for companies, investors and policy-makers.