The World Economy’s Urban Future

  Image: JOHANNES EISELE / AFP / Getty Images

Image: JOHANNES EISELE / AFP / Getty Images

Project Syndicate | 10 August 2018

Today’s major cities are often islands of stability and good governance in oceans of uncertainty, partly because they are better able to adapt to changing realities than entire countries. In this sense, they can serve as role models, if not vanguards, for the new political-economic models the world needs.

SINGAPORE – Since the global financial crisis began a decade ago, the major countries of North America, Europe, and East Asia – which together represent the vast majority of the world’s economy – have been searching for sustainable political-economic models that can weather the considerable challenges they face. They have largely failed to find them.

Now, a decade after the financial crisis of 2008 hit, economic and political alarm bells are ringing around the world. A growing number of economists predict that the next global economic slump is just around the corner, probably to be triggered by surging government and corporate debt. After all, America’s budget deficit is on track to surpass $1 trillion by 2020; many European banks appear to be wavering again, owing to a lack of eurozone debt restructuring; and China’s debt-to-GDP ratio is approaching the dizzying heights seen in Japan.

Economic concerns are compounded by persistently dysfunctional politics. In the United States, President Donald Trump’s trade tariffs will potentially tip America’s economy into recession, while the upcoming midterm elections all but guarantee policy paralysis.

In Europe, Brexit, which promises to be disastrous for the United Kingdom’s economy, is already derailing the country’s politics. Meanwhile, France, Germany, Spain, and Italy continue to struggle – largely alone – with unemployment, immigration, political extremism, and the need for structural reform.

As for China, President Xi Jinping is facing rare – and increasing – criticism at home, just months after lawmakers abolished the two-term limit on his rule.  This criticism appears to be incited by the economic headwinds facing the Chinese economy, most prominently trade tensions with the US, and a vaccine scandal. Across Asia, countries have grown suspicious of the Chinese regime’s high-tech nationalism and diplomatic revisionism.

Three Transformational Trends

Compounding the challenge ahead, the world’s leading economies now must confront three seemingly irreversible and interconnected trends, beginning with rising – and increasingly entrenched – inequality, fueled by globalization and financial capitalism. The top 1% of income earners worldwide control 50% of global wealth. And though the absolute number of people living on less than $1-2 per day has fallen, at least 4 billion people still earn less than $10,000 per year.

Inequality is likely to be exacerbated further by the second trend: labor redundancy caused by automation. Robots are expected to take over 800 million human jobs by 2030, with lower-skill jobs disproportionately affected.

Countries that once hoped to leverage their low labor costs to attract manufacturing activities, especially in South Asia and Africa, are now set to continue importing goods that they would ideally produce themselves. Even if low-cost 3D printers allow them to supply many everyday items domestically, the millions of jobs that the manufacturing sector created in decades past will amount to only thousands in the decades to come.

But low-skill jobs are not the only ones that are at risk. Artificial intelligence has already cut deeply into the tech sector in India, for example, with net new employment in the “business process outsourcing” sector suddenly dropping to zero, as algorithms take over call-center work.

The third trend is demographic. Some demographers still project a world population that could reach above 12 billion, creating a Malthusian crisis of intensifying competition for food and other limited resources, especially in Africa. But, in recent years, family sizes have plummeted worldwide, owing to poverty-reduction efforts, improved health care and education, and rapid urbanization.

With fertility in the mature economic regions of North America, Western Europe, and Northeast Asia already at or below replacement rates, the world population is expected to remain under ten billion by mid-century. South Korea’s population is declining even faster than Japan’s. Dependency ratios across Europe are high and rising. And the US relies on Latino and Asian migrants to keep the population growing. While overpopulation remains a problem in some areas – in particular, Africa and India – in many others, demographic deflation has already begun.

Uncharted Territory

Economic inequality, automation, and demographic stagnation reinforce one another. After all, Russia’s birthrate cratered in the decade following the collapse of the Soviet Union in 1991.  And it is no coincidence that the US – the only Western country where median income has fallen (by nearly $5,000) since the financial crisis – is facing declining fertility rates. America’s millennial generation (aged 22-36) no longer expects to earn as much as their parents, and housing is not affordable in major cities – trends that can also be seen across Europe. Amid such financial insecurity, this generation lacks the confidence to invest in the future, including by having children.

The problem is that, historically, population growth, expanding trade, technological innovation, and rising productivity have been the key drivers of economic development. With populations tapering, trade liberalization facing a backlash, capital (rather than labor) capturing the gains from technology, and productivity growth slowing in many regions, achieving sustainable, robust, and inclusive growth will demand a new approach.

Many countries have compensated for the post-crisis shifts in the economic terrain with monetary and fiscal stimulus, essentially using macroeconomic policy to steer business cycles. But this is not a long-term solution. In the wake of its quantitative-easing program, US growth is again driven by rising consumption, rather than productive investment, against a background of mounting government, corporate, and household debt.

The Urban-Rural Divide

Any new approach to ensuring sustainable economic growth will have to take into account urban-rural dynamics. Nowadays, much of the developed world is characterized by a kind of neo-medieval combination of populous and dynamic urban clusters (such as America’s Boston-New York City-Washington corridor or China’s Pearl River Delta) and depopulated and failing towns and provinces (such as the US Rust Belt and parts of inland China).

The urban-rural divide is also reflected in politics, particularly in the West. Urban Americans are more likely to be socially liberal and vote for Democratic Party candidates; New York City, Los Angeles, andnearly 500 other cities have dubbed themselves “sanctuaries,” willing to protect the migrants on whom their economies depend from deportation by the Trump administration. London and Edinburgh voted overwhelmingly against Brexit. In highly diverse Berlin, there is little support for the chauvinist views of the far-right Alternative für Deutschland (AfD). Those kinds of nativist political ideologies do, however, find considerable backing in rural and exurban areas.

This divergence partly reflects city dwellers’ recognition that their economies’ success depends on their ability to attract global talent, from billionaire tycoons to industrious entrepreneurs to energetic millennials. By contrast, without large-scale infrastructure investment, skills upgrades, and substantial demographic reinforcement, rural economies will continue to wither.

The Global Demographic Competition

The question, then, is how to attract the needed human capital. Surveys of millennials across the developed world show that what they prize most is affordable housing, efficient public transportation, and tailored education opportunities (such as tech bootcamps).

These requirements can be difficult to fulfill. Consider real estate. From San Francisco to London, the lack of affordable housing is driving away young talent, while real-estate bubbles are bursting from China to the Persian Gulf. Cities as varied as Denver, Berlin, Lisbon, Bangkok, and Manila are now racing to provide the modern, affordable housing options sought by millions of mobile millennials seeking locations that enable them to stretch their uncertain incomes.

Millennials also tend to demand a liberal culture tolerant of diverse lifestyles. According to the millennial-focused relocation agency Nestpick, almost all of the top ten cities are in Europe or Canada. The values many millennials embrace may not be universal, but they are prevalent enough to provide an indication of what it takes to be a successful city today and tomorrow.

In our neo-medieval world, cities are often islands of stability and good governance in oceans of uncertainty. This is partly because they are better able than entire economies to adapt to changing realities. In this sense, they can serve as role models, if not vanguards, for their countries and regions.

Dynamism and Demography

It national politics can emulate municipal dynamism, it is conceivable that each of the world’s leading economic regions could transform itself, following the lead of its most successful cities. What might that look like?

In Asia, managing debt levels, sustaining rapid poverty reduction, creating millions more urban services jobs, and keeping borders open to migration are the key to ensuring that the current pace of growth persists for another two decades or more. In this scenario, urbanization breathes life into many emergent and thriving hubs, from Lahore to Guangzhou to Busan, as pragmatic governments use fiscal and regulatory tools to improve public services and ensure access to capital for small and medium-size enterprises.

Meanwhile, government efforts to ease cross-border mobility help China, Japan, South Korea, and Thailand to address labor shortages by importing young workers from across the Association of Southeast Asian Nations. And the Chinese regime’s Belt and Road Initiative becomes a grand multilateral effort to connect Asia’s economies, enabling more efficient commerce among their billions of residents.

As for European countries, they seem to have weathered the worst of the financial crisis –Germany’s unemployment rate is the lowest since reunification in 1990, while Spain’s dropped by nearly ten percentage points over the last year  – with social cohesion mostly intact. But they are still working to maintain social-democratic welfare states through labor, tax, and other reforms.

The key to success – and to remaining stable and productive overall – will be to manage the political challenge of mutualizing uneven sovereign-debt burdens and to facilitate the cultural assimilation of the millions of migrants their economies need. To support future growth, it is also important to keep infrastructure stock of high quality, and to deploy fiber-optic Internet and 5G.

Toward a More Prosperous Future

Policymakers should test new ideas. In the egalitarian Nordic economies, major firms have begun reducing working hours for all, in order to minimize overall unemployment, while experimenting with universal basic income-type schemes. In France and the Netherlands, 3D-printed homes offer affordable housing in close proximity to jobs.

The Anglo-American model, which has historically driven our thinking about entrepreneurship and innovation, is now the most troublesome, with many in the US and the UK increasingly skeptical of the collective price they have paid for the freedom that has produced many of the world’s 1% luminaries. Inadequate social-safety nets – weakened in the name of free-market capitalism – and widening economic inequality are fueling insecurity and stoking frustration.

Making matters worse, populism and xenophobia are scaring away much-needed foreign talent. But even if US voters reject Trumpism and the UK manages to break its current political impasse, both countries will need to develop a new social contract and a more credible vision of solidarity if they are to remain models worth emulating.

For the US, in particular, success is not out of reach, because the country’s resources, technology, and financial and human capital remain unparalleled. No other country has 40 major metropolitan clusters, which, through a robust infrastructure program, could become the pillars of a more egalitarian society. A more pragmatic foreign policy – especially toward its economically complementary neighbors, Canada and Mexico – would enable all of North America to achieve unrivaled stability well into the future.

The Uncertain Road Ahead

These are not forecasts, but scenarios – evolving narratives that could take hold if wise political and economic decisions are made. We cannot yet know who will make such decisions, finally building the political-economic models that their countries so badly need, and thus who will emerge as winners and losers in a complex and turbulent global landscape.

For now, all we know is that cities, not countries, are acting as the main drivers of economic and social transformation. Those that navigate the challenges posed by inequality, automation, and demographics in new and innovative ways will be the ones that lead their countries – and the world economy – into the future.

Parag Khanna is Managing Partner of FutureMap, a data and scenario based strategic advisory firm, and author of numerous books such as Connectography (2016), Technocracy in America(2017), and the forthcoming The Future is Asian (2019).

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