Historically symbols of emancipation and freedom, cities today are becoming increasingly vertical and densely populated. Externalities and conflicts of interest are growing, making public intervention both more necessary and more difficult. This is a challenge not only for local administrations but also for national governments.
We are increasingly citizens of the world. The proportion of the population living in cities is steadily rising everywhere. In the early 1960s, only one-third of the world’s population was urbanized; today, two out of three people live in cities (see this month’s chart). This trend is evident both in countries experiencing demographic decline and in those with growing populations. In the former, rural areas are primarily (though not exclusively) experiencing depopulation, while large cities such as New York and Tokyo continue to grow. In the latter, the populations of megacities increase annually by 3-4%, doubling within just 20 years (our readers may recall the Rule of 72).
New Delhi now has 35 million inhabitants, compared to 17 million in 2005. China, historically sparsely urbanized (only 5% of its population lived in cities at the start of the last century), is now creating the megacities of the future: Shanghai currently has 31 million residents, up from 17 million in 2005, and Beijing has 23 million inhabitants, compared to 12 million in 2005. Plans are underway to build 91 new cities worldwide, spanning India, Egypt, Saudi Arabia, Indonesia, Honduras, and the United States. Even Bhutan is planning a “Mindfulness City” inspired by the principles of its Gross National Happiness Index.
The concentration of employment and income opportunities in large cities, along with the desire for social interactions, is driving this rapid urban growth. In advanced economies, only two out of every hundred people work in agriculture. Elsewhere, too, agriculture is providing jobs to an increasingly small minority of the population. Services dominate employment, and their location is driven by what economists call agglomeration economies: it pays to be close to one another. These forces are so strong that many businesses choose to cluster near competitors. There are streets monopolized by shoe shops, areas exclusively offering ceramics, and urban zones where nearly every doorway leads to a restaurant. Consumers seeking shoes, ceramics, or dining options flock to these areas for the wide range of choices.
For service providers, the benefits of attracting so many potential customers outweigh the costs of competing on price. Moreover, differentiation allows businesses to offer unique menus or products whose prices are harder to compare with those of competitors. This, in turn, provides consumers with more options.
The Value of Intangibles
Not all cities have successfully adapted to the shift toward service-based economies. Only one-third of traditional industrial cities have managed to transform themselves and overcome the crises triggered by the closure of large factories, which directly or indirectly employed hundreds of thousands. Comparing cities that succeeded (like Pittsburgh) with those that endured prolonged decline (like Detroit) sheds light on the key factors driving urban success.
Infrastructure, such as roads, subways, and transportation networks, is often thought to underpin urban growth. It is believed that large projects and events, such as the Olympics, can revive struggling cities. However, major events often burden cities with white elephants that quickly become ruins, pushing municipalities to the brink of bankruptcy.
The true key to urban success is often something far more intangible: human capital. That one-third of industrial cities that survived deindustrialization did so thanks to highly educated workforces and the presence of universities and research centers. While these institutions employ only a small portion of the population, the influx of highly skilled workers attracts others and generates many additional jobs for those with lower skill levels, in sectors such as personal services, hospitality, and retail.
Remote Work and AI as Centripetal Forces
Many imaginative predictions about urban evolution after the pandemic are proving unfounded. Remote work is a very imperfect substitute for in-person work. Many jobs cannot be done remotely, and even for those that can, businesses continue to require employees’ presence in hybrid arrangements, where work is split between home and office. This is because informal interactions often lead to innovations and productivity improvements.
As a result, cities have not become less attractive. At most, they have taken on a doughnut shape, with reduced density in the center and increased density in peripheral areas where housing prices are more affordable.
Similarly, artificial intelligence (AI), like all communication technologies, seems destined to be more effectively utilized in urban centers than in rural areas. AI can help manage public transport networks, reach those in need of social assistance, and improve the quality of urban services. Cities thrive on interactions, and AI will facilitate these, even among people speaking different languages.
Increasingly Dense Cities
The rapid growth of cities drives up property values. To contain land costs, buildings are demolished and replaced with taller structures. Over the past 120 years, the number of skyscrapers built worldwide has grown by an average of 5% per year. Cities are becoming taller, even in developing countries. The central areas of Nairobi, where housing prices are highest, are filling with skyscrapers. Urban areas are becoming denser, with more inhabitants per square kilometer.
Tourists also contribute to the overcrowding of cities, particularly cultural capitals, bringing income but also congestion. Alongside the benefits of easier access to services and employment, urban areas also face growing negative externalities—costs imposed on others, such as traffic congestion or pollution caused by driving.
The pandemic starkly illustrated the pervasiveness of urban externalities. Urban centers suffered significantly higher mortality rates than rural areas, despite having better hospitals and doctors and younger populations. Where externalities are most pronounced, public intervention is needed to reconcile individual behaviors with collective well-being. Instead, cities often grow chaotically, with housing developments replacing planned roads or green spaces, becoming increasingly ungovernable.
Governing Cities
This issue of eco explores ways to make cities more manageable by addressing some of their most pressing problems. Local governments need funding, and for municipalities, property taxes can be a major revenue source. We examine how to avoid disproportionately impacting low-income residents or depressing the economy. We discuss how the economic and distributive effects of various local transport network designs often differ significantly from public operators’ objectives.
We highlight potential benefits of reducing air and noise pollution through the adoption of electric vehicles and the expansion of bike lanes. We assess the regulation of short-term rentals managed by platforms like Airbnb to prevent soaring housing costs, which could ultimately drive working-class residents out of city centers and make access to top universities prohibitively expensive. We also envision polycentric, archipelago-like cities.
Will local governments have the strength to tackle these challenges? In his interview with us, Mayor Sala repeatedly calls on the national government, emphasizing that intervention is impossible without clear central policies. This may seem like finger-pointing or a reflection of differing political majorities between Milan’s municipality and the national government. However, it is true that conflicts of interest are more intense in densely populated areas. Any intervention, from building a bike lane on a busy street to changing the direction of a one-way road, is bound to significantly upset someone. National governments can take a more detached approach and resist local power groups’ pressures.
Moreover, many major urban externalities have both local and national dimensions. For instance, the human capital externalities generated by clusters of advanced sector companies in Milan benefit both local and national economies through increased income and innovation.
Cities have historically been places of emancipation and freedom, the cradle of democracy. Yet no place better exemplifies Martin Luther King’s words: “My freedom ends where your rights begin.” This is why governing urban growth and imposing restrictions on residents’ behavior is essential for collective well-being. In the era of globalization, supporting urban regulation is one of the most tangible actions national governments can take, giving them renewed purpose. A country’s future is inextricably linked to the future of its cities.
P.S. In the next issue of eco, we will address public debt.
