Wednesday, November 9, 2011

The Promise and Challenges of Latin American Cities

The Mckinsey “ What Happens Next?” article suggests that in all likelihood, the next decade will mark the first since the Industrial Revolution where emerging economics add more to global growth than all developed countries a whole. In the construction, agriculture, and mining sectors, emerging economies’ contribution has been as high as 80 percent in recent years. Consequently, over the next ten years, it is believed that GDP per capita will rise nearly five times faster in emerging economies than in OEDC nations. McKinsey analysts believe that emerging-market led recovery will be the most salient feature in the coming ten years for the global economy. All major emerging markets are undergoing demographic shifts which have strategically positioned them for growth: unprecedented growth in the labor force as well as rapidly declining birthrates. Another important demographic shift, is the nearly 1.5 million people who move to cities each week, the economic impact usually refers to step-change gains in output per worker as people move off subsistence farm jobs and into urban jobs, and China and India have seen a rise in labor productivity at more than five times the rate of Western countries as their traditionally agrarian economies became manufacturing and service powerhouses. To a lesser, yet notable degrees, ASEAN, Latin American, and Eastern European nations as well as certain portions of the Middle East and North Africa are also players in this economic “ rebalancing.” The article concludes that the Great Rebalancing and greater economic activity in emerging markets will force established multinational companies to change their strategic foci as winning emerging markets before other companies will become an increasingly important indicator of global leadership.

In assessing the implications of this article for emerging markets, I wanted to focus on Latin America which, as a region, which is also promising in terms of future economic growth, yet has had difficulties in reaching growth levels even marginally comparable to China and India. An article series by the McKinsey Global Institute suggests that in order to continue along the path for greater development and economic recovery, Latin America must take advantage of its cities. There is a strong correlation between growth of the urban work force and economic development, and several shortcomings in infrastructure have impeded sustained growth in the region. The region is more urban than any other in developing markets, and approximately 80 percent of its population live in cities compared to 50 percent in China.

Cities are critical to Latin America’s overall economy, and the regions largest 198 cities ( with populations of 200,000 or more) contribute more than 60 percent of its GDP. The ten largest of those alone produce 30 percent. Given the prominence of cities to Latin America’s economy, fulfilling cities’ economic potential is key to sustaining growth in the region at large. The relative youth of the workforce, which will keep expanding until it peaks in 2040, makes the need to improve the urban landscape even more pressing.

If the economies grow enough to generate jobs for the large workforce, much of it is expected to take place in urban settings where the shortcomings are glaring. The largest cities have started to run into capacity constraints as the demand for housing in metropolitan regions has annexed smaller towns which lie outside the government’s jurisdiction. The result is a tangled web or actors which have to divvy up urban management responsibilities, which has, in turn, adversely affected policy and planning as well as funding. More concretely, cities have greatly outgrown the capacity of their infrastructure, their transportation systems, and their ability to deliver basic public services which has created an employment deficit for an ever-expanding labor force. The challenges in the future are very significant, but meeting them will ensure that Latin American cities will experience economic growth commensurate with the size of the labor force.

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