Atlantic Cities | November 17, 2011
By Parag Khanna and Thomas Sevcik
Oil prices remain near record highs, gold has gone through the roof, technology sector equity valuations are frothing over and emerging markets are decoupling from the moribund West. As investors seek new or alternative asset classes as either safe harbors or high-return prospects, there is an essential new portfolio that needs to be developed: cities.
The emerging markets category in particular is fraying. Witness how, according to MSCI, mature markets like South Korea retain emerging market status, while clearly stable and booming economies like the UAE are still labeled “frontier” alongside Kenya. Such labels are too broad, encompassing a wide range of countries with divergent trajectories. At the same time, they lack nuance, failing to take into account that a city’s fate can often be decoupled from that of its home country. The aftermath of the financial crisis has starkly revealed how this is indeed the case. Unemployment remained lower in cities, which also recovered faster. European cities have rebounded demonstrably faster from the financial crisis than EU nations as a whole. Greece, Italy, and Portugal might be finished from an investor’s standpoint, but Athens, Rome, Milan and Lisbon certainly are not.
These discrepancies come together when we look at high-growth city centers outside the core economies. In Ukraine or Egypt, over 90 percent of foreign investment comes just to the capital cities of Kiev and Cairo, while the rest of their large populations struggles as ever before. Quite a few such cities might be smart economic bets even when their home nations are performing poorly. Angola is most certainly a frontier market, but it was also the world’s fastest growing country last year, at 18 percent, based on the energy, banking, real estate and infrastructure activities in the capital city of Luanda. It is in many ways becoming a regional magnet, the first in sub-Saharan Africa outside of South Africa.
For decades, national governments have sought to strike a balance between regulating and promoting the corporations that generate much of their wealth and overseas influence. The same is even more the case for cities. Today the Gross Value Added of cities per capita far exceeds that of their home nations. According to the Brookings Metro Monitor, 150 cities representing just 12 percent of world population account for 46 percent of total GDP.
There are far more meaningful and investment-worthy cities than there are nations. But we need better metrics to measure their performance and invest in their potential.
Like climate, fresh water or food, cities should be thought of commodities to be priced and optimized for maximum benefit. But for cities to be treated as an asset class alongside emerging market regions, commodities, or alternative financial products, governments and the financial sector will require broader, more precise, and better-integrated data to analyze. This means moving beyond competitive surveys and branding toward real and broader data collection and learning networks that improve the collective global management of our vital city habitats.
It is time for a serious city performance index to emerge that provides real-time data which banks, insurers, property developers, investors, and municipalities can actually use to capture rapidly changing urban dynamics. Earlier this year, the Financial Times reported that hedge funds sought to short U.S. municipal bonds on the basis that data was insufficient as whether cities were actually solvent. Some of the data that will necessary include indicators around entrepreneurship levels and capital investment, education and creativity, political stability and hybrid governance institutions.
Each city is a unique and complex ecosystem of currents and patterns. Still, better city metrics can create a status drive that will spur improvements in the way the World Economic Forum’s Global Competitiveness Index or Transparency International’s Corruption Perceptions Index has done among countries. Banks like HSBC, for example, increasingly reward city performance in sustainability, for cities are the targets of most clean-tech investments. Measuring, pricing, and investing in city performance is a crucial step not only toward maximizing economic value, but in creating a stable foundation for world society and the global economy.