Urbanization is well established as a powerful growth tool for emerging markets. As economies advance from agriculture to manufacturing to advanced manufacturing, logistics and services, higher-value economic activity becomes more concentrated in urban areas and more productive. As a result, urban wages tend to be higher than rural wages, which in turn fuels higher commercial and real estate investment, and greater demand for goods and services.
Urbanization is a development tool that is not available to all emerging markets, however. Many emerging markets are most of the way toward or have already passed the 80 percent average urban population share common in advanced economies. So even though urbanization, if thoughtfully executed, can help boost growth as economies develop, many emerging markets have already squandered much of this opportunity.
Some countries, like China, have used urbanization as a springboard to advancement and rapid growth — what we refer to as the “urbanization dividend.” The development experience in these countries contrasts sharply with those, like Brazil, that have allowed rampant urbanization to overwhelm existing physical and social infrastructure, thereby generating unemployment, poverty and inequality.
China has achieved a per capita income level of around $4,000 (in 2005 U.S. dollars) which is roughly double Brazil’s per capita income at the same level of urbanization in 1970. China is on a path to sustain that income advantage as urbanization continues in future years (Chart).
As we explained in our November 2014 report, Understanding the Demographic Dynamics of Market Opportunity, the income benefits of China’s urbanization did not occur by accident:
China instituted an explicitly urban-friendly set of policies focused on industrialization and export-oriented market liberalization to create economic opportunities in cities. At the same time, Hukou policies strictly controlled the pace of rural-urban migration, creating a successful form of “active urbanization.”
The resulting influx of foreign trade and investment in manufacturing created millions of job opportunities. As rural-urban migration continued and cities grew, a growing base of new wage-earners spurred even more demand for homes, goods and services in domestic markets. As a result, urban per capita incomes are now about three times greater than rural per capita incomes.
Brazil, in contrast, is a prototypical example of “passive urbanization.” Returning to our November 2014 report:
In Brazil, “passive urbanization” resulted from a large rural-urban migration that was driven more by a lack of rural economic opportunities than an abundance of urban economic opportunities. An inward focus on domestic industries without market liberalization prevented Brazil (and other Latin American countries) from reaping the full economic benefits of foreign trade and investment. Moreover, the lack of physical and social infrastructure has created urban favelas that concentrate the poor and the problems of poverty.
China has shown that establishing growth-oriented open market policies early in the urbanization phase is critical to attracting productive rural-urban migration. Alternatively, Brazil’s current and past government and economic crises demonstrate how geopolitical turmoil and corrupt or misguided governance can overwhelm demographic factors and cripple economic growth potential. Establishing the necessary physical and social infrastructure in urban areas is key to unlocking the urbanization dividend.
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