Cities lead on economic growth

By the year 2025, Belfast will be one of the world’s 20 richest cities in the world, measured by GDP per capita.  That at least is the prediction of the highly respected consultancy firm McKinsey’s in a report published two years ago.  The potential rise of Belfast in terms of wealth and influence is an example of how cities are expected to be the economic power houses of the future.


One of the changes taking place is that where in the past it has been megacities that have been the industrial workshops of the world, in the modern economy it is the medium sized cities such as Belfast that will prosper most, and perhaps also some of the smaller cities such as Londonderry.  In the future it is the concentration of knowledge and specialist skills in urban centres that could be key to their advancement.


According to the McKinsey report, ‘Urban World: Mapping the economic power of cities’, 60% of economic growth in the coming years will be generated by the top 600 world cities – including Belfast.  Those cities contain just 20% of the world’s population, yet already generate 60% of global wealth.  McKinsey concluded that medium sized cities’ economies are growing fastest and will generate more than their share of future growth.


“Contrary to common perception, megacities have not been driving global growth for the past 15 years,” reported McKinsey.  “In fact, many have not grown faster than their host economies and we expect this trend to continue.” Instead, says McKinsey, medium sized cities in the developed nations and megacities in the emerging markets will between them generate about 45% of global growth in the period to 2025.


In England, it is the mid-sized cities that are already delivering some of the most welcome economic growth.  Fast growing cities – as ranked by gross value added (GVA) – include Reading, Milton Keynes, Swindon, Portsmouth and Wakefield.  Those middle sized English cities achieve above average economic performance, according to a recent Centre of Cities report.


PwC’s chief economist in Northern Ireland, Esmond Birnie, says that different types of geography favour different types of sector.  “Clearly, certain activities and aspects of financial services are centralised globally in the two cities of London and New York,” he says.  “But for a range of other activities there is a logic that favours medium sized cities, for example for business and tradable services.”


Cities with less than a million residents – and perhaps even those with less than half a million residents – have various strengths compared to the largest urban centres.  Those include shorter journey times, house price affordability, air quality and other aspects of quality of life.  Here Belfast – and to a lesser extent Derry – scored highly in the recent PwC Good Growth for Cities Index.  It concluded that both cities are well placed for exciting levels of economic growth in the coming years.


Various studies have concluded that cities need four key ingredients to be successful.  They need good surface and air travel connectivity, good universities and a strong skill base, both at graduate and non-graduate levels.  Belfast performs well on all these criteria.


Disturbingly, though, the Centre for Cities report provides an additional indicator of fitness for growth – history.  It may be significant, it seems, that two of the fastest growing English cities are Reading and Milton Keynes, which are essentially both very young cities and which are built on new and still developing technologies.


The Centre for Cities’ report was entitled ‘Cities Outlook 1901’ and the name gives a hint to its main findings.  It concluded that a city’s prosperity is built on its skills and there is a close relationship between the skills base of a city today with that of more than a century ago.  The research found that seven of the eight best performing English cities today had above average skills levels in 1901, whereas 80% of cities that are vulnerable within the contemporary economy were among those cities with the lowest skill levels way back in 1901.


Cities that broke away from their skills heritage were those where central government invested most heavily in transport, creating more open local economies.  Some improved cities also strongly benefited from other central government investment, including in social housing.


It is not news that the world is going through one of its most profound social changes in human history through urbanisation.  In 1800 a mere 2% of the global population lived in urban areas.  By 1950, this had increased to 30%.  At the end of the next decade, the United Nations expects more than 60% of the world’s population to live in urban areas.


Yet the UK has moved in the opposite direction, according to a report produced by the Policy Exchange, a think-tank with links to the Conservative Party.  Its report, ‘Cities for Growth’, found that the UK has gone through a process of de-urbanisation, with increasing numbers of city dwellers moving into rural areas to live, while often commuting into work.


The impact of this de-urbanisation is a significant loss of productivity and a failure to capture the economic benefits that urbanisation provides.  The Policy Exchange proposes major changes to the planning system to enable cities to grow larger and reduce pressure on the countryside.


At the end of last year, a major inquiry was established to consider how best to support the economic growth of cities.  While the inquiry – the City Growth Commission – is focusing on England, its conclusions will presumably be almost equally relevant to Northern Ireland.  Chaired by one of the financial services industry’s best known and most highly respected figures – Jim O’Neill, former chairman of Goldman Sachs Asset Management – the findings are expected to be very influential on future policy.


The premise of the inquiry is that the UK economy needs to rebalance and that cities will be the engine for growth as this rebalancing takes place.  The Commission is to produce what it calls “a practical plan for ensuring that our cities are able to compete successfully in a world in which growth will increasingly be driven by mid-tier cities”.


International evidence will be studied by the Commission, which will examine the role of public sector reform in improving cities’ economic performance.  It will also consider what factors drive innovation and productivity improvement and how devolution away from London can support the development of other cities.


Perhaps most significantly, the Commission will look at how cities can develop the skills base needed for the modern economy.  Factors examined will include labour market reform options, employment support measures, childcare provision, the welfare strategy and how to enhance skills.


It seems clear that a consensus has emerged not only that cities are the primary means for achieving economic growth, but also that devolution of powers to local levels is needed to enable this to happen.  This has particular significance for Northern Ireland, which is on the cusp of substantial reform of local government, but where in recent decades district councils have had precious few powers by either international or UK standards.


This could be a period in which Belfast, and perhaps also Derry, can achieve substantial economic progress.  But this is not a given.  McKinsey’s prediction will only come about if the right policies are put in place.

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