Does increasing urban density lead to economic growth?

Simon White | This article looks at whether increasing urban density is a driver for local economic growth.

Does increasing urban density lead to economic growth?

Many cities across Australia are planning for increased urban density. This, we are told, will make infrastructure more feasible and improve the quality of life our urban centres have to offer.

But will it?

Does an increase in urban density lead to economic growth?

More people are living in cities than ever before

Around the planet, urban densities are increasing rapidly: In 1950, 30 per cent of the world’s population lived in urban areas. By 2018, this had increased to 55 per cent and in 2050 the proportion is expected to rise to 68 per cent.

Australia reflects this trend. In 1901, 36 per cent of the Australian population lived in capital cities and 64 per cent in other urban and rural areas. By 2017 this pattern was reversed, with 67 per cent living in capital cities and 33 per cent in other urban and rural areas. In 2016/17, Sydney, Melbourne and Brisbaneaccountedfor over 70 per cent of Australia’s population.

Density is good

Living in large cities is good for many people. As the local population increases, public investments into infrastructure and public transport become more feasible. Larger cities are cleaner and more energy efficient than smaller cities and towns. Denser settlement patterns can reduce carbon emissions, and city dwellers live closer to medical and educational facilities. There are also a more diverse range of better paying jobs in larger cities, compared with smaller settlements.

There are two broad economic arguments put for the value of increasing densities. The first is presented by the urban economists who describe the impact of city size on the productivity of urban workers at the city level. They emphasize the cumulative nature of knowledge generation and diffusion where productivity increases as cities grow.

Second, are the ‘new gconomic geographers’ who examine the relationship between industry agglomeration and economic performance. Increasing city sizes, they argue, lead to more agglomeration of people and firms. The density of central places provides the social connectivity that allows a firm or market to maximise the benefits of technological connectivity. Cities generate formal and informal knowledge that firms and workers can more easily access. Larger cities increase productivity, producing greater economic growth.

Saskia Sassen helps us understand cities in a global context. Cities have historically provided national economies with a central point of focus. Their increased urban density creates diverse skills, firms, information, and markets. But in the global context, the role of cities is about connectivity. The network of about 50 ‘global cities’ are a part of a global super-circuit driven by capital, talent and services. There are also hundreds of smaller cities located in smaller global networks circuits.

As businesses reach beyond national boundaries to compete in global markets, our cities are challenged with providing globally relevant services and infrastructure.

In Australia, a 2014 report by the Grattan Institute, Mapping Australia’s Economy, finds that central business districts (CBDs) contribute strongly to economic activity because this is where the jobs are concentrated and because CBD businesses are more productive on average than others. For example, in 2011-12 the Sydney CBD produced $100 in value for every hour worked there, while nearby Parramatta produced only $68 for every hour worked there. Areas close to CBDs that produce high levels of economic value include North Sydney ($10.2 billion), Richmond in Melbourne ($4.4 billion), Paddington in Brisbane ($3.4 billion) and my own suburb of Subiaco in Perth ($4.2 billion).

So, density is good because it makes infrastructure, transport and other services more affordable; it boosts worker productivity, promotes agglomeration and generates knowledge that helps firms become more productive and competitive.

All this leads to economic growth, which in turn leads to more specialised and better paid jobs.

But this link is not automatic. In fact, our understanding of the spatial dimensions to economic growth are not so clear and generally under-studied.

How to become a successful urban economy

Population growth is not enough to turn our cities into globally relevant places to live and work. We need to look more deeply at the things we are good at and where we are placed in the world.

Infrastructure Australia’s 2018 Future Cities publication describes how population growth is a ‘central driver’ of the ‘profound change’ Australia’s four largest cities are currently facing. In the next 30 years, Sydney’s population will increase by 2.4 million people, to 7.4 million; Melbourne by 2.7 million people, to 7.3 million; Brisbane by 1.6 million to 4.3 million; and Perth by 2.2 million to 4.3 million people.

The problem is: population growth does not always drive economic growth. This is not a linear relationship.

In their 2017 paper, Frick and Rodríguez‐Pose from the London School of Economics examine growth in different sized cities in 113 countries between 1980 and 2010. They found the link between city size and economic performance was not clear cut. For a majority of the countries they studied, relatively small cities of up to three million inhabitants were found to be more conducive to economic growth. Mega-cities, with a population of more than ten million were found to promote growth only in countries with large national and urban populations, while cities between three and 10 million were not found to have a systematic influence on growth at all.

The cities that performed best in the Frick and Rodríguez‐Pose analysis were those with a high share of industries that benefit from agglomeration, had a well‐developed urban infrastructure and good local governance.

Successful urban economies are typically based on a clear economic vision that lays out sustainable pathways to growth based on current and emerging industry competencies, workers skills and specialisations, and the competitiveness of local firms. Skilled managers and technicians are attracted to these cities because they are paid well, see career opportunities and a better quality of life for their families. Businesses invest and expand through their participation in markets and networks that extend beyond the city, while deepening their knowledge and competencies. Young people see education, training and career opportunities that are relevant in national and global labour markets. The under-skilled and the under- and unemployed also see positive prospects in retraining and new work opportunities.

Economic development is not completely based on numbers. Increasing populations will increase the size of the local market with more people to feed, clothe and serve, but this alone is not enough. Success in this century requires a global outlook and a strategic investment into people, firms and industries that engage in new and emerging markets. This requires government to work with business leaders and civil society to plot a path for development that harnesses our human resource toward a shared local vision for economic and social development in a globalised world.