It is an analytically and empirically verifiable fact that cities are the engines of growth that power all economic development. Therefore it is argued that for catalysing economic development, a policy of assisting the inevitable (and indeed desirable) urbanisation through the creation of liveable, deliberately designed cities is effective and efficient.

The development of economies largely follows a predictable trajectory where the majority of the labour is first employed in agriculture, then in industry, and finally in services. With rising productivity, agriculture releases labour to industry, which in turn through the use of technology becomes more efficient and releases labour to the services sector.

The services sector is of particular importance because it is where research in the sciences and development of technologies occur; it is where ideas are generated. Those ideas are critical for greater productivity and production in the two older sectors — agriculture and manufacturing — which consequently release more labour for the services sector. The production, delivery and consumption of services happen more efficiently
in cities.

Humanity is getting rapidly urbanised. About 27 million people — about three percent of a total of 900 million — lived in cities in 1800; by 1900, 10 percent of 1.6 billion were urban; now over half of the world’s 6 billion live in cities. It is estimated that over 70 percent of the world’s 10 billion people of 2050 will be urban.

Despite all the negatives such as crime, pollution and overcrowding one associates with them, cities are disproportionately productive. Today around the 1.2 billion people living in 40 mega regions of the world produce two-thirds of the world’s output of goods and services. They also produce more than 85 percent of all global innovation. A person living in a mega-region compared to a person not living in a mega-region is eight times as productive in terms of goods and services, and about 24 times as productive in terms of innovations.

Cities “manufacture” wealth. This is literally true as most manufacturing occurs in urban locations. That is why rich economies are predominantly urban, and those economies that are largely rural are relatively poor. The transition from a poor economy to a rich one depends on the transition of the majority of the population from being rural to urban. The central concern of economic growth is the development of people. The development of rural populations must not be conflated with the development of rural areas and the rural population cannot be—and must not be—confined to villages. The rural population has as much right and the aspiration to live and work in cities as anyone else. In fact, rural populations will get urbanised whether one likes it or not. There is an instinctive drive which motivates people to seek greater opportunities in places where there are greater choices. As the great scholar of urban areas Jane Jacobs put it, “The point of cities is multiplicity of choice.”

Building from scratch India’s urbanisation cannot be accomplished with the stock of existing cities. They are already bursting at the seams and cannot conceivably accommodate the 300 million estimated to be added to the urban areas by 2030. There is an urgent need to create new urban centres that are designed to be efficient, human centric, and liveable.

That is the greatest opportunity India has — of building from scratch to take advantage of all the knowledge of how to build cities and specifically to avoid the mistakes of the previous generation of cities — which is not available to any developed economy such as the United States. American cities are notoriously inefficient in terms of resource use and sustainability. Their legacy urban centres will burden the transition to living in more sustainable cities.

Just like India leapfrogged the expensive landline era and became a leader in the use of cheaper, modern and more flexible wireless telecommunications, India can urbanise more efficiently and faster by building new cities instead of the costly exercise of giving old cities and towns expensive face-lifts.

This author has proposed that India needs are new “designer cities”: cities that are deliberately designed and that have a distinct character to them. Complex artefacts such as computers and commercial jetliners are the product of deliberate design learned over generations of hard work. Cities are some of the most complex creations of humans and must be designed to be good.

The distinctive characters of cities arise from the major functions that cities serve such as commercial, financial, educational, recreational, pilgrimage, art, manufacturing, and hundreds of other activities. Singapore, for example, serves as a financial hub for South East Asia much as London and New York do for the Western world. It was deliberately designed to be one. Similarly a city could be designed with the primary purpose of hosting a set of great universities, and so would need all associated supporting services such as theatres, art, museums and sports. A city whose core function is manufacturing would have different needs such as access to ports, vocational institutions and transport hubs.

There are many interesting ideas on how to enable urbanisation. Paul Romer, senior fellow at Stanford University, has been promoting the idea of “charter cities.” A charter city is a green-field project that starts off with a constitution or a set of rules. People and organisations which like the charter come together to build the city. Mr Romer says, “…[P]roposing some new rules [in a charter city] and then asking who would like to opt in—who would like to live under these new rules—could give us a mechanism to reform the rules under which we live, to change them, to improve them much more rapidly.”

India is at that stage of its development where bold policy decisions have the potential to accelerate its economy and thus lead hundreds of millions out of poverty and into prosperity. The time is ripe for a national policy that allows new cities to develop and permits the market mechanism to fund them. India needs to adopt big ideas because the idea of India is too big to be paired with little ideas.

And now a quote from Romer about economic growth.

Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material.

. . .

Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. The difficulty is the same one we have with compounding: possibilities do not merely add up; they multiply.

- Paul M. Romer, “Economic Growth”, The Concise Encyclopedia of Economics, 2007

Urbanization of the population implies greater demand for housing in cities. There has to be a portfolio of housing options available for the diversity of people which constitute a city. I am familiar with the property prices in the San Francisco Bay area, one of the highest in the US. Even I get a sticker shock when I see the prices of housing in Mumbai. I cannot imagine how the poor manage to survive. Which partly explains why about half of Mumbai’s 11 million people live in slums.

Last week Saturday I was at the ISB in Hyderabad to attend a working group on urbanization. One of the most important components of urbanization is housing. At the ISB, Dhaval Monani is working on affordable housing and has plans in place for putting up low cost around 250 sft homes (on 450 sft land parcels) for around Rs 2 lakhs (or $4,000). They will be built around industrial areas which are often situated in the outskirts of cities. That’s an exciting project.

Now I hear (Hat tip: Naman) that Tata is entering the affordable housing sector. See the BusinessWeek report, “Tata’s Nano Home: Company behind world’s cheapest car to sell $7,800 apartments”

Tata, the Indian company that made worldwide headlines with its $2,000 Nano car, now plans to build 1,000 tiny apartments outside Mumbai that will sell for $7,800 to $13,400 each. The company plans to roll out low-cost projects outside other major cities.

TIME.com has a bit more of the details.

The homes will be built in three sizes, all extremely cramped by Western standards: 283 sq. ft. (one room, including kitchen plus a bathroom), 360 sq. ft. (ditto), and a 465-sq.-ft. model with a tiny bedroom. In addition to the modest proportions, Tata is relying on economies of scale and careful sourcing of materials to keep costs low. The Mumbai project, for instance, will get its steel from group company Tata Steel, which has plant at nearby Tarapore. Land-acquisition costs will be minimized by giving the original landowner a percentage of each project’s returns. The homes will occupy cement buildings no more than two stories high, because construction costs go up as buildings get taller. There will be eight to 12 homes per building.

I took a look at the floor plans of these units and I must say that I liked them.

Good job, Mr Ratan Tata.

A few excerpts below the fold.

In 2008 a historic landmark was crossed, with more than half the world’s population now living in urban centers. Cities have traditionally been — and continue to be — crucibles for creativity, innovation, and wealth; as such, their extraordinary growth is often associated with a rapid rise in living standards, prosperity, and quality of life. Indeed, the more-urbanized countries are, on average, richer, and the world’s two most populous countries, China and India, are undergoing unprecedented experiments in urbanization, mostly as a means of achieving greater wealth.

. . .Regardless of the indicator, the larger the city, the more innovative the “social capital” it produces. For example, if the size of a city doubles, then, on average, wages, wealth, the number of patents, and the number of educational and research institutions all increase by approximately the same degree, about 15 percent. We refer to this systematic phenomenon as “superlinear scaling”: The bigger the city, the more the average citizen owns, produces, and consumes, whether it’s goods, resources, or ideas.

However, the dark side of urban life manifests an analogous “superlinear” behavior. Doubling the size of a city increases wealth and innovation by about 15 percent, but it also increases the amount of crime, pollution, and disease by roughly the same amount. . .

. . . Cities have emerged as the source of the biggest challenges the planet has met since humans became social, yet as reservoirs of creativity and ideas, they are also the source of the solution.

The remarkable and seemingly inextricable linkage between the benefits and costs of community very likely has its origins in the “universal” network structure and group clustering of human interactions: When humans began serious interpersonal interactions about 10,000 years ago, forming sizeable communities, discovering economies of scale and the fruits of “wealth creation,” they brought a fundamentally new dynamic to the planet, a dynamic beyond biology. The resource and energy networks that have evolved to sustain biological organisms and ecosystems are primarily dominated by economies of scale (“sublinear scaling”). The dynamics of such networks constrain the pace of biological life to decrease systematically with increasing size. For example, in comparison with small mammals, big mammals live longer, take longer to mature, and have slower heart rates and cells that work less hard (think mouse versus elephant!).

In contrast, the social networks that underlie the “superlinear scaling” of wealth creation, innovation, crime, and pollution behave in exactly the opposite fashion: The bigger the organization, the faster the pace of life. In big cities, disease spreads more quickly, business is transacted more rapidly, and people walk faster  — all in approximately the same systematic, predictable way (the same ~15 percent rule).

. . . in social organizations where growth is driven by superlinear scaling, growth is unbounded, never reaching an “asymptotic” stable state, and proceeding at a rate that is faster than exponential. To sustain such growth in the light of resource limitation requires continuous cycles of paradigm-shifting innovations such as the discovery of iron, steam, computation, and most recently, digital technology. . . Theory dictates that the time between successive innovations must get shorter and shorter. So if we insist on continuous growth driven by wealth creation, not only does the pace of life inevitably quicken, but we must also innovate at a faster and faster rate!

Until recent times the interval between major innovations far exceeded the productive life span of a human being. But this is no longer true: The time between the most recent major shift from computers to IT was only about 20 years and is destined to get even shorter. This pace is surely not sustainable and, if nothing changes, we are heading for a major crash — a potential collapse of the entire socioeconomic fabric. Can we return to an analogue of the sublinear, “biological” phase whence we evolved and its attendant, natural, no-growth, asymptotically stable configuration? Is this even possible? Can we have the kind of vibrant, innovative, creative society driven by ideas and wealth creation as manifested by the best of our world’s cities, or are we destined for a planet of urban slums or the specter raised by McCarthy’s The Road? The challenge is clear: The key to long-term sustainability of the planet lies in applying a scientific lens to cities, with the goal of understanding their dynamic structure, growth, and evolution.

Make no little plans. They have no magic to stir men’s blood and probably themselves will not be realized. Make big plans; aim high in hope and work, remembering that a noble, logical diagram once recorded will never die, but long after we are gone will be a living thing, asserting itself with ever-growing insistency. Remember that our sons and grandsons are going to do things that would stagger us. Let your watchword be order and your beacon beauty. Think big.

That quote has appeared before on this blog. Two years ago in April 2007, I wrote in the context of India’s urbanization that India should “Make no little Plans.” Nearly four years ago in July 2005, the same quote appeared in the post where I revisited the “Integrated Rail Transport System (IRTS)” proposal that I promote. India needs a modern — efficient and fast — rail transportation system. I concluded that post with

. . . India always uses outdated ancient technology. For once, India should aim to use the best. And using the best — even if initially imported — will help us learn how to make the best. We need to have the humility to say that we need to import stuff that we can’t make today. We need to have the pride which makes us want to take the imported stuff and improve upon it so that others will look to us when it comes to the technology. We need to have the courage to make big plans.

We need to move beyond the myopia of the politicians and the idiocy of the generals wanting to arm themselves with nuclear subs and missiles and the greed of the peddlers weapons of mass destruction.

We need vision more than we need resources.

What brought this to mind is a recent editorial in the Indian Express titled — surprise, surprise — “Make No Little Plans” (Hat tip: Pranav Vasistha.) It talks about the US plan to spend $13 billion on a set of high-speed rail links. The US was never in the business of making little plans, anyway. But the US has not displayed the most exemplary of visions when it comes to rail transportation. Thankfully, reality is creeping up on them and they will figure it out eventually. Better late than never, I say. Now the high and mighty are quoting Burnham and saying “make no little plans” about rail transportation.

India should wake up and instead of making little plans must think big. Then I will stop having to say, “I told you so.”

I strongly believe that the only way India can sustain its long-term economic growth is by unleashing and harnessing the creativity of its grassroots entrepreneurs, especially in rural areas. But here is the challenge: these grassroots inventions don’t scale up. Indeed, most rural innovation initiatives such as DesiCrew and grassroots inventions like Mitti Cool, however impressive they may be, are sadly limited in their impact to a local or regional market of a few hundred customers, and end up employing no more than a dozen workers in the local community. What is missing is a mechanism to cross-pollinate and scale up these bright ideas among India’s 250-million-strong agricultural community which lives scattered across more than 600,000 villages.

I find the paragraph interesting. His belief that “the only way India can sustain its long-term economic growth . . . by unleashing and harnessing the creativity of its grassroots entrepreneurs, especially in rural areas” is approximately right. The bit that raises questions is “especially in rural areas.” Surely, “the only way” cannot be “especially in rural areas.” Rural areas and “sustained long-term economic growth” are incompatible and inconsistent. This is puzzling since in the same paragraphs he explicitly recognizes the limitation that rural areas have — a matter of scale.

We need to go back to the fundamentals, as always.

Generally speaking, economic growth arises from an increase in productivity (the amount of goods and services that an hour of labor produces). Productivity increases depend on the degree of specialization, a fact that is well-known since Adam Smith’s 1776 book “The Wealth of Nations.” The degree of specialization is limited by the size of the market. The smaller the market for a specific good (that is, the volume of supply and demand), the smaller degree of specialization it can support, and therefore the smaller the gain in productivity through specialization.

Rural markets are small because of fragmentation. The rural market is fragmented even though the rural population is huge. Integrating the fragmented markets is a big task and there are several approaches to it depending on the good or the service under discussion. For instance, for goods markets to be integrated, the transportation system has to be efficient. For services, if it is a service that can be delivered over a wire, a good telecom infrastructure can integrate the market. But if the service is non-transportable — such as a hair cut or plumbing service — then the only way is through aggregating the scattered rural population.

The natural way that markets become integrated is when the scattered village population moves to aggregate themselves into towns and cities. Cross-pollination of ideas and economies of scale (what Navi mentions in that paragraph), and hence the integration of markets, occurs naturally in dense aggregations of people.

The bottom line is this: India is heterogeneous along all dimensions, including people and places. There are leading and lagging places. The broad policy thrust has to be the development of people, not places. That means, the policy should be the development of people in the lagging areas, not the development of the lagging areas. The complementary policy for the leading areas is the development of the place.

Summary: Develop the people of lagging areas (policy A) and develop the infrastructure of leading areas (policy B). The policies A and B have to be implemented simultaneously. Policy A creates human capital who can (by migrating to the leading areas) become more productive given the infrastructure produced by policy B.

Grass-roots entrepreneurs, the ones mentioned by Navi, regardless of how clever they are, are likely to find limited success as long as they are forced to operate in small markets (that is, having to live in villages.) Larger markets are only available either in places with dense aggregations of people, or where the transportation and telecommunications infrastructure is efficient enough to provide integrated market even with scattered populations.

The long-term sustainable economic growth that Navi talks about in the quoted portion above is not possible in the context of rural areas. As long as rural populations are involuntarily restricted to rural areas, they will be forced to low productivity levels. India’s long-term economic prospects are linked to how effective India’s policies are in transforming the currently rural population into an urban population.

India too needs a bold urban vision, as I have been arguing for a while. Fortunately (or unfortunately, depending on how you look at it) for India, most of India does not live in cities. India does not have to reinvent its cities — it has to build new ones. Fortunately though, the world has learned a lot about building livable cities and India does not have to go about reinventing the wheel: India has to be smart enough to learn from the mistakes the others have made. India can — and must — build efficient cities. That’s the only way out for the hundreds of millions trapped in villages in rural India.

I have been arguing for an rail transportation backbone for India. I proposed an “Integrated Rail Transportation System” in July 2005 (with follow ups here and here.) Broadly I have been arguing for a rational urbanization policy, an energy policy (which stresses the long term goal of developing non-carbon based energy technologies), a mass transportation system, and a modern educational system.

Here, for the record, are some bits from the NYT article:

. . . Europe and Asia began to supplant America as places where visions of the future were being built. The European Union spent decades building one of the most efficient networks of high-speed trains in the world, a railway that has unified the continent while leading to the cultural revival of cities like Brussels and Lille. And environmental standards for new construction were not only encouraged, they became the law — and have been for more than a decade.

This investment in traditional large-scale infrastructure projects is increasingly being coupled with serious thinking about the future of cities themselves. The Swedish government recently began a promising competition for a design that would replace a decrepit 1930s-era bridge in the heart of Stockholm with a seamless system of locks, roadways and shops. In Madrid the government is completing a plan to bury a four-mile strip of freeway underground and cover it up with parks and new housing. And only a few weeks ago the French government concluded a nine-month study on the future of metropolitan Paris. The study, which included some of Europe’s most celebrated architects, is the first phase in a plan to create a more sustainable, socially integrated model of “the post-Kyoto city.”

Even China, a country where centralized planning often looks like a grotesque parody of American postwar development, is beginning to move toward more sustainable, dense urban models. The government recently announced an $88 billion plan for freight and passenger trains that will link every major urban center along the country’s coast, from Beijing to the Pearl River Delta. And it is building miles of subway lines in booming cities like Shenzhen and Guangzhou.

We have had two lectures so far. I am having fun — which is another way of saying that I am learning quite a bit. I think I will share some of what I have learned on this blog in the next few weeks.

The title of the course is pretty descriptive of the content. Manufacturing is what leads to material wealth. India is poor because India is not an industrialized economy. Why it is not an industrial country is a question worth investigating. Whatever the answer to that question, there is little doubt that for India to become industrialized, one of the necessary conditions is that it has to urbanize. Manufacturing requires the urbanization of the population.

More to come. But for now, here’s something that talks about India’s manufacturing. It is from an article from over 100 years ago. It appeared in The Atlantic in October 1908: The New Nationalist Movement in India by Jabez T. Sutherland.

Another cause [aside from taxation] of India’s impoverishment is the destruction of her manufactures, as the result of British rule. When the British first appeared on the scene, India was one of the richest countries of the world; indeed it was her great riches that attracted the British to her shores. The source of her wealth was largely her splendid manufactures. Her cotton goods, silk goods, shawls, muslins of Dacca, brocades of Ahmedabad, rugs, pottery of Scind, jewelry, metal work, lapidary work, were famed not only all over Asia but in all the leading markets of Northern Africa and of Europe. What has become of those manufactures? For the most part they are gone, destroyed. Hundreds of villages and towns of India in which they were carried on are now largely or wholly depopulated, and millions of the people who were supported by them have been scattered and driven back on the land, to share the already too scanty living of the poor ryot [small farmer]. What is the explanation? Great Britain wanted India’s markets. She could not find entrance for British manufactures so long as India was supplied with manufactures of her own. So those of India must be sacrificed. England had all power in her hands, and so she proceeded to pass tariff and excise laws that ruined the manufactures of India and secured the market for her own goods. India would have protected herself if she had been able, by enacting tariff laws favorable to Indian interests, but she had no power, she was at the mercy of her conqueror.

The article is worth reading. It has breadth and more importantly, it is still relevant today. Change some of the names and the nationality of the rulers, the story of exploitation and extraction of wealth — instead of creating wealth — remains the way it was a long time ago.

We have forgotten the history and therefore are doomed to repeat it.

The course is an exploration of the idea (related to the theme on cities and urbanization explored on this blog) that economic growth and urbanization are bidirectionally linked. I hope to argue the case for urbanization of India based on simple economics.

Some apparently simple ideas have profound implications. One such is the idea of economies. It comes in various flavors: scale, scope, agglomeration, internal, external, and so on. These are tied to other concepts. Scale economies arise from the presence of fixed costs. Which brings us to the varieties of costs — fixed, variable, marginal, sunk, etc.

Like most foundational courses, it will be a vocabulary course. Vocabulary is important because without it, reasoning about a topic would be too tedious if not impossible. A course on the economics of urbanization is, aside from anything else, a course on economics. My job will be to build the vocabulary so that one can competently reason about the matter of urbanization and with some luck, reach some tentative position on why it matters, and the policy implications that flow from that position.

Should governments go with the flow and encourage the growth of cities or should they instead be spending money on rural development?

For the first time in history more than half of the world’s population live in cities -home to some of the poorest, as well as the richest, people on the planet

This mass migration from the countryside to urban areas is now being championed by the World Bank, which believes that cities – slums and all – offer the best hope of ending poverty. Cities, the argument goes, drive economic growth – encouraging entrepreneurship, innovation and wealth creation.

So should governments go with the flow and encourage the growth of cities?

Or should they instead be spending money on rural development?

Featuring some of the world’s foremost economic thinkers – from Nobel laureate Paul Krugman to anti-poverty campaigner Jeffrey Sachs – ‘Slums and Money’ explores the arguments for and against. At stake is the poverty or prosperity of billions.

One in every ten people lived in urban areas a century ago. Now, for the first time ever, most people live in cities. By 2050, the United Nations projects, almost three-quarters of the world’s population will call urban areas home. The majority of this growth is centered in struggling, developing countries of the Global South, but cities in developed (or Global North) countries face increasingly complex challenges as well.

To help manage and plan for this accelerating urbanization, the Rockefeller Foundation convened an exceptional group of urbanists–leading policy makers and government officials, finance experts, urban researchers, members of civil society organizations, and other innovators–for a Global Urban Summit at the Rockefeller Foundation Bellagio Center. This book shares their diverse perspectives, creative approaches, and urgent agenda for harnessing the vast opportunities of urbanization for a better world.

[Link for ordering the book free.]

I doubt many in Mumbai even know who the mayor of the city is – it’s a largely ceremonial post. There was no powerful official representing Mumbai’s city administration simply because the administration has no power to speak of. The responses in the immediate aftermath of the attacks – orders to the police and military, evacuation operations – flowed from the state and central governments. It was the state, central and defence officials who seemed to be in charge. An entire tier of government at the local level appeared non-existent.

This had huge repercussions in the speed and efficiency with which Mumbai responded to the attacks. The city’s police were ill-equipped for any sort of rapid response. The NSG commandos who cleared the hotels had to be flown in from Delhi – and after their arrival in Mumbai, had to wait for hours to be transported from the airport.

As economists have pointed out, urbanization and economic prosperity are bidirectionally related as causes and consequences. To a significant extent, the poverty of India is directly a consequence of the neglect of planned urban growth. Gandhi and Nehru — as they usually do — get the wrong end of the stick and India suffers. I have made this point too frequently on this blog. Here’s Nandan:

The Indian city has long been exiled from our collective imagination. The romance of the ‘village republic’ for India’s politicians and the strong association of the city with the British Imperial Raj doomed the city in Independent India. Gandhi said, ‘I regard the growth of cities as an evil thing’ and for Nehru the city of New Delhi was ‘un-Indian’.

Now there is some hope for India. Thoughtful and influential people like Nandan Nilekani understand how the world works much better than politicians like Gandhi and Nehru. Which brings a broader point to mind: the shift of power from the (widely recognized as corrupt) politicians and bureaucrats to thoughtful people who create wealth and actually help social welfare.

Related posts: See “Urbanization and Development of India.”

Thanks to Sudipta Chatterjee for the link.

There is a definite positive relationship between the size of the habitation and the productivity of the population.”

The full article is below.

Urbanization and Development of India

Atanu Dey

Economic growth and development is intimately connected with the urbanization of the population. The relationship holds empirically, both across time and space. Analytically it is easy to see why economic growth and development is both a cause and consequence of urbanization.

The scale and quality of the basic habitation unit determines the success of an economy. A large number of small villages is sufficient for poverty; a number of large cities is necessary for prosperity. Specifically with reference to India, the vast majority of the population lives in villages and ekes out a meager existence from agricultural related activities.[1] For India to develop, it is imperative that India’s 700 million rural inhabitants have the opportunity to live in urban areas and work in non-agricultural sectors.

The world is getting urbanized

The big picture clearly shows that the world is getting urbanized at an accelerating pace. The entire world’s population was around 900 million in the year 1800. Less than 3 percent of that population—about 27 million people—lived in cities. The world population nearly doubled in the next hundred years. By 1900, the global population had grown to 1.6 billion, of which only around 10 percent were urbanized. Now, another hundred years later, more than half the world’s population of over 6 billion lives in cities. Estimates place around 70 percent of the world’s projected population of 10 billion in the year 2050 in cities. Human civilization is becoming a predominantly urban civilization.

Mega-regions

There is a definite positive relationship between the size of the habitation and the productivity of the population. From ancient times, larger cities have produced disproportionately more of the innovations, advances, and the production of every sort of goods and services. We recall the names of ancient cities because things of importance happened in them, mostly of the type that advanced human knowledge and capacity.

As global population has grown, the size of the average major city has grown alongside. Today we have what can be called “mega-cities” or “mega-regions.” They bear the same relation to the average city of today as in the past a large city bore to a small town or a village.

The mega cities are easy to identify. They are collection of tens of millions of people whose annual production is measured in trillions of dollars. Their names are familiar: Greater Tokyo (a $2.5 trillion economy of 55 million people), Boston-Washington corridor ($2.2 trillion, 54 million people), and mega regions around London, Frankfurt, Chicago, Atlanta, Rome, Amsterdam, etc.

Around 1.2 billion people live in 40 mega regions of the world, and produce two-thirds of the world’s output of goods and services. They also produce more than 85 percent of all global innovation. Which means that the rest of humanity – nearly 5 billion people, or four times as many people as those who live in the mega regions – living the 191 countries produce only a third of the global output and only a sixth of the innovations? [3]

That point is worth stressing. A person living in a mega-region compared to a person not living in a mega-region is eight times as productive in terms of goods and services, and in terms of innovations is about 24 times as productive.

Cities are engines of growth

Cities are engines of growth because they “manufacture” wealth. This is literally true as most manufacturing occurs in urban locations. That is why rich economies are predominantly urban, and those economies that are largely rural are relatively poor. The transition from a poor economy to a rich one depends on the transition of the majority of the population from being rural to urban.

There is a definite trend and a correlation between the growth of cities and the progress of human civilization. This relationship is established by the increased production of goods and services. This creation of wealth is a consequence of the urbanization since urbanization makes manufacturing possible.

There is more stuff relative to people today than existed any time in our history because manufacturing stuff requires less labor per unit of output. That’s what economists call “economies of scale”: the cost of production per unit goes down as the volume of production goes up. Large manufacturing units produce stuff more efficiently.

Large manufacturing units require lots of people and large amounts of supporting activities, which in turn require even more people. In other words, a population living in a collection of villages is not as productive as the same population living in a city and engaged in manufacturing. Cities are the engines of growth because they make manufacturing possible, and manufacturing has scale economies.

Infrastructure and Cities

Manufacturing requires cities because the high population and high population densities of cities reduces the cost of getting things done. Another way of stating that is to say “transaction costs” are lower in cities. This is explained by the nature of infrastructure.

Infrastructure has “scale economies” – the larger the amount of infrastructure, the lower the cost per unit of infrastructure. Thus the high aggregate demand for infrastructure in urban areas allows sufficiently large supplies at lower average costs. Lower costs translate into more efficient services and therefore the advantage that cities have over rural areas in conducting business.

An example: Providing Education

There are a number of well-known causative factors that lead to economic growth. Among them are an educated and healthy population, reliable and adequate infrastructure, a free and fair market-driven economy, and the availability of public goods such as law and order, political freedom, efficient governance, etc. These causative factors have complex interdependencies and have to be present—simultaneous in time and co-located in space—for economic growth and development. These factors of economic growth can be most efficiently provided in—and are usually associated with—cities.

Cities provide educated people the opportunity to use their skills because cities have the supporting infrastructure and other skilled people, both of which are necessary for skilled people to fully utilize their specialized skills.

Cities aggregate a large number of people with different skills which make all of them mutually dependent for being productive. Furthermore, the education of the next generation itself is most efficiently provided in cities. Thus cities are the centers not just for the use of education but also the provision of education.

An attempt at providing highly diverse and sophisticated education to small village populations is prohibitively expensive. Every center of excellent learning – schools, colleges, and universities – is associated with urban areas, either from the beginning or from the urbanization of the place where a great center of learning is created.

Given a large enough population at a specific location, the demand for education will be sufficient for its efficient supply. A lot of people are required to provide the educational services. These people in turn need supporting services that are provided by even more people in that location.

To provide for the needs of the people, infrastructure—power, telecommunications, houses, parks, roads, water, sanitation, etc—is needed. To provide all the infrastructural services, you need yet more specialized people. Following this line of reasoning you soon reach the conclusion that it needs a city. It needs a city because a city is at the heart of a developed modern complex highly skilled highly specialized economy. Any developed and rich economy is primarily a collection of cities.

Rural Development

It is important to keep in mind that the central concern of economic growth and development is the development of people. For far too long, Indian policy has conflated the development of rural people with development of villages. That confusion has predictably led to waste of time and resources. Village development is costly because India has too many – over 600,000 – and if the limited resources available for development is spread out over them, then per village the amount available is not sufficient to affect major changes.

By insisting on the development of villages, scarce resources, which could have been more efficiently used elsewhere, are wasted. There is another way of using the same resources, and that is the development of cities. Thus, paradoxically, the answer to rural development – or more accurately the development of rural people – actually lies in the development of urban areas.

Urbanizing India’s Population

The rural population of India has to urbanize. The existing cities, however, are bursting at the seams and cannot possibly accommodate any more people. Practically all Indian towns and cities are unplanned and inefficiently use land and other resources. They are arguably inadequate for the current residents, leave alone adding hundreds of millions more people to them. The existing urban centers would do with a massive makeover but doing that is expensive. [4]

There’s a need to have new urban centers to accommodate the hundreds of millions of rural people. Imagine building absolutely new cities from scratch for 600 million people. Imagine 600 new large cities of one million people each. Imagine building houses, schools, shopping centers, parks, factories, roads, public utilities, hospitals, libraries, . . . And imagine doing that using the best urban planning known to humanity.

That is the greatest opportunity India has – of building from scratch – which is not available to any developed economy such as the US. American cities are notoriously inefficient in terms of resource use and sustainability. Their legacy urban centers will burden the transition to living in more sustainable cities.

But India does not have that legacy burden. [5] Most Indians living in villages would welcome the chance of living in well-designed efficient cities. They are already doing so as is evidenced by the fact that tens of millions of rural people migrate to cities – often choosing to live in urban slums. They are voting with their feet saying that life in an urban slum is preferable to life in a village.

Conclusion

The economic development of India requires economic growth. Cities are engines of growth because there is a bi-directional link between urbanization and growth. Therefore the rural people have to be urbanized for India’s development and growth. Every economy has followed that path which begins with agriculture being the main source of income for the majority of the population and ends with agricultural employment being a very small fraction of the total labor force.
India needs to stop making little plans and start thinking big.

Make no little plans. They have no magic to stir men’s blood and probably themselves will not be realized. Make big plans; aim high in hope and work, remembering that a noble, logical diagram once recorded will never die, but long after we are gone will be a living thing, asserting itself with ever-growing insistency. Remember that our sons and grandsons are going to do things that would stagger us. Let your watchword be order and your beacon beauty. Think big.

Daniel Burnham (1846 – 1912)
Visionary urban planner and Chicago architect

NOTES:

[1]. It is a reasonable guess that you, the reader, are unlike the average citizen of a developing country in the sense that you live in a city and are engaged in non-agricultural work. Moreover your above average income is related to your living and working in an urban area.

[2]. In the year 1900, the world’s 10 largest cities were (in descending order of population) London, New York City, Paris, Berlin, Chicago, Vienna, Tokyo, St Petersburg, Manchester, and Philadelphia. The combined population of those 10 cities was approximately 26 million. By 2005, just Tokyo — the largest city then — itself had 35 million people, followed by Mexico City with 19.4 million. Mumbai with 18.2 million ranks 5th. [Source: www.192021.org ]

[3]. The Rise of the Mega Regions Wall Street Journal April 12, 2008.

[4]. Fires, earthquakes, carpet bombings have served that function for many other cities in the past.

[5]. There’s an interesting analogy illustrating the burden of a legacy. The US had one of the best landline based telecommunications system in the world by the early 1970’s. That legacy system actually prevented them from transitioning to a more efficient mobile telephony system in the 1990’s. India, given that there was no landline telecommunications system to speak of, immediately leapfrogged the twisted copper-wire stage and went straight to the more efficient wireless system. Sometimes it helps to arrive late.

The real driving force of the world economy is a new and incredibly powerful economic unit: the mega-region.

Extending far beyond a single core city and its surrounding suburbs, a mega-region is an area that hosts business and economic activity on a massive scale, generating a large share of the world’s economic activity and an even larger share of its scientific discoveries and technological innovations.

While there are 191 nations in the world, just 40 significant mega-regions power the global economy. Home to more than one-fifth of the world’s population, these 40 megas account for two-thirds of global economic output and more than 85% of all global innovation.

The author, Richard Florida, notes that “The problem is that much of our public policy not only ignores the rise of the mega-regions, it actually works against them. If we want to bolster economic competitiveness and ensure long-run prosperity, we must pursue policies that take mega-regions into account.”

. . . it’s time to stop transferring wealth from our most productive mega-regions to lagging places. In the U.S., the past 50 years have seen a massive transfer of tax money from innovative and prosperous mega-regions on the East and West coasts to the South. While this transfer may be a boon to local politicians and developers, such misguided policy has diverted economic resources away from the core mega-regions where they can be used most productively.

This transfer of wealth from the most productive to the least productive is seen most starkly in Mumbai’s case. Mumbai is starved for resources even though it is one of the most productive regions in India. As I have been arguing for a while, cities are the engines of growth and if one wants to help the people of rural India, India has to move them to where they will be most productive. And that means that India has to build cities that are livable and which will be the target of the inevitable rural to urban migration.

India’s development requires that the rural population is urbanized since urbanization is a cause (and also a consequence) of development.

Though the article is written in the US context but much of it applies to India also. I have been arguing about fast rail connectivity between India’s metros. The WSJ article says:

. . . our urban policy should not be aimed only at improving schools, creating affordable housing and redistributing income. Urban policy must also start to address economic competitiveness. It must strengthen mega-regions by improving fast-rail transit between their nodes, modernizing airports, and achieving greater cross-border flows of goods and people.

I think it is time that India starts to seriously re-think its fetish with villages. One of Gandhi’s fetishes (and he had a few strange ones such nude sleepovers with teenage girls) was villages, and Gandhi is an Indian fetish. So this strange fascination with villages is really fetish-squared.

Related links:

(1) I have a 10-part series which begins with this post: Ancient Cities, Modern Slums.

(2) An Integrated Rail Transportation System (IRTS). And a follow up to it: IRTS Revisited.

See 19.20.21 for a quick overview of the defining megatrend of the 21st century: the rise of supercities.

In the year 1800, less than 3% of the world lived in cities. Most people lived their entire lives without ever seeing one.

In 1900, 150 million people live in the world’s cities. That number has now surged past 3 billion and last year crossed another tipping point: more than half the people on earth now live in cities. By 2050 – it will be more than 2/3 of us. Humans are now an urban species, cramming into vast urban agglomerations.

Also from the presentation at the site, I note that in the year 1900, the world’s 10 largest cities were (in descending order of population) London, New York City, Paris, Berlin, Chicago, Vienna, Tokyo, St Petersburg, Manchester, and Philadelphia. The combined population of those 10 cities was approximately 26 million. By 2005, just Tokyo — the largest city then — itself had 35 million people, followed by Mexico City with 19.4 million. Mumbai with 18.2 million is listed 5th.

There is a definite trend and a correlation between the growth of cities and the progress of human civilization. India needs to figure out how to manage the transition of its rural population into livable cities. Without the urbanization of India’s rural population it is not even remotely possible for India to work its way out of poverty.

[For more on this topic, see the posts on Cities and Urbanization.]

Economic growth in a sense, and to a much larger extent economic development, is more akin to a game of golf than a game of chess. In golf, the opponent’s moves matter very little; you may as well play by yourself and later compare scores if needed. In chess, your move depends on how your opponent has moved and how he is likely to respond to your move. In other words, chess is a strategic game while golf is not. All this is very broadly speaking, naturally. I don’t mean to imply that there are no dependencies among economies as they grow; what I mean is that, especially for a large economy like India, how much it produces and how determines how materially prosperous it is and is independent of how other economies are growing. For strictly benchmarking purposes, one can glance over at the neighbors. And if one is smart, one can learn from the experiences of those neighbors. Still, when it comes to economic growth, it is largely the case that you are playing against yourself.

Here I want to glance at India’s large northern neighbor and recently a strategic competitor in the fiercely competitive game for control of scarce resources. China has been moving mountains — quite literally as you will soon note — for quite a few years for growing its economy. From an Indian perspective, it is a chilling reminder that there are no shortcuts to economic growth and that it takes something special in terms of will and perseverance to overcome the ill-effects of flawed economic policies and failed leadership. It is also a story of hope and the indomitable human spirit, a story of almost superhuman striving by mere mortals.

Words, not Numbers

Regular readers of this blog may have noticed that rarely do I have charts, graphs, and tables of statistics in my posts. It is not that I mistrust those devices as they do illuminate the subject. But I leave the numbers to sources that do rely on them for making their points. Honestly speaking, I am fairly suspicious of numbers that have pretenses to a degree of precision that is not even theoretically possible. In one report I had read (from some global consulting firm), I had seen figures which made my head hurt. It said something like, “By July of 2010, the US would have outsourced 10,573,425 jobs to India.” I wondered if they meant July 1st or July 31st; and whether it was by 10 AM of a particular date or was it by 10:30 AM. How did they know that the number in the units’ place was 5 rather than 6 or 4?

I am convinced that you, gentle reader, have seen a lot of numbers projecting what is going to happen to India by such and such a date. One report that I recently glanced at was from KcKinsey which Sramana Mitra has blogged about recently on the growth of India’s middle class. Makes fascinating reading, I am sure, for MBA-types. But I digress. I will get back to that McKinsey report in a different post shortly.

For now, I would like to point you to a National Geographic feature titled “China’s Boomtowns” from June 2007 (Hat tip: Abhishek Sarda.) It is well worth the 10-odd minutes it takes to read it. No charts and graphs there. But it tells a story that makes you admire the spirit of the Chinese. There are lessons in that story that underline some of my obsessions that have to do with the prerequisites of economic growth in the modern world. Without any charts or graphs, the story is replete with lessons that we should have learnt and perhaps we still can if only our benighted leaders were to pay attention.

Similar Pasts

For much of the recent past, China and India were similar in many respects. Very large populations, very deep and widespread poverty, largely agricultural, and saddled with brain-dead economic policies rammed down the throats of the powerless populations by ignorant policymakers. Then the Chinese people got lucky: they got a dictator who was smart. This dictator was different from the other dictator who had propelled China into a “Great Leap Forward” which left tens of millions dead. India matches the first part of China’s story — it got a dictator who wanted to personally control India’s climb into “The Commanding Heights” but succeeded in digging a very deep hole for most of the 350 million living around 1950 that even 60 years later, the number of deep-hole dwellers is variously estimated to be between 500 and 800 million. Thanks awfully, Mr Jawaharlal Nehru.

The new path that the dictator of China took around 1970 propelled economic growth and lifted hundreds of millions out of the hole that had been dug for them by communism. India, by contrast, continued along the path blazed by Nehru, and the path was solidified into an 8-lane superhighway by his daughter. (She was another ignorant autocrat — and appeared to be fairly convinced that ignorance was better than knowledge since she saw no need for the education of the masses. Though she had all the opportunity in the world, she herself never got any formal education and I believe was kicked out of Shantiniketan, a school where you would have to work hard to get kicked out of. The irony that numerous educational institutions are named after her would not be tolerated but for the ignorance of the Indian population.)

India went careening down this superhighway of socialism until it was wrecked through a collision with the barrier of a balance of payment crisis. Headless chickens have been known to display more foresight than the architects of India’s economy.

But I digress once again. Let me get back to what China did: it became the world’s manufacturer. Manufacturing is capital intensive but if you do enough of it, you do require lots of people. Lots of people churning out stuff means that there is more to go around. So labor is attracted into the sector and the laborers get paid wages. Those wages may be low compared to advanced industrialized economy standards but are far superior to the alternative of starving on a farm in the rural interior of China.

Manufacturing

Where did all the wealth that exists in the world today come from? (Wealth is stuff — not money. Stuff that we eat, stuff that shelters us, stuff that transports us, etc.) It is largely manufactured. There is more stuff relative to people today than existed any time in our history because manufacturing stuff requires less labor per unit of output. The fact though is that manufacturing has what economists call “economies of scale”: the cost of production per unit goes down as the volume of production goes up. So large manufacturing units produce stuff more efficiently. And large manufacturing units require lots of people and large amounts of supporting activities which in turn require even more people. In other words, a population living in a bunch of villages is not as productive as the same population living in a city and helping with manufacturing. Cities are the engines of growth because manufacturing has scale economies.

Cities, not Villages

Indian policy makers have an obsession with villages. Villages were Gandhi’s fetish; and Gandhi is an Indian fetish. So I think that the policy maker’s obsession derives from the fetish**2 (the fetish of a fetish) that Indians indulge in. I am not against fetishes, mind you. My own obsession with the primacy of individual freedom compels me to approve of all personal fetishes. Whatever floats your boat, is what I say. But when fetishes intrude into sensible policy making, I draw the line.

So the point that I am attempting to make is this. Build cities. That will require a great deal of manufactured stuff. So you need lots of manufacturing. And forget the crumbling mega-slums we currently pretend are cities, and forget the tiny impoverished settlements we call villages. Build livable cities and build factories that will produce the stuff that the poor currently don’t have because it is not produced. Manufacturing so much stuff will require lots of people. And we have people coming out the wazoo — they are currently stuck in a declining agricultural sector.

Yeah, move a few mountains. They do that in China. India can imitate that bit at least.

I take the risk of quoting that report in full just in case one of these days it goes behind a subscription wall.

Are you one of those people who think of big cities as little more than hotbeds of pollution, crime and social inequalities? Well, think again. A new report in this week’s Proceedings of the National Academy of Sciences USA confirms what many city dwellers, who account for the bulk of people on Earth, have claimed for years: Cities have an almost magical ability, spurred by increased human interaction, to stimulate innovation and increase wealth.

The report also pooh-poohs the popular comparison of the growth of cities with biological organisms. An animal slows as it balloons in size ; in contrast, the researchers note, cities speed up as population and everything from crime to per capita income grow.

Cities create a sort of “urban economic miracle,” says study co-author Luis Bettencourt, a research scientist in Los Alamos National Laboratory’s Theoretical Division. “When you integrate all these people and all these activities and the struggle to make a living, total productivity increases,” he says.

Bettencourt and his colleagues at Arizona State University (A.S.U.), Dresden University of Technology in Germany and New Mexico’s Santa Fe Institute, modeled the growth of a city according to three categories of factors: material infrastructure (road surfaces, electrical cable, etc.), human needs (such as total energy consumption and housing) and patterns of social activity, including total bank deposits, research and development, new cases of AIDS and new patents filed. The researchers sifted through an extensive amount of data on many urban systems—mostly big American cities, but also European (primarily German) and Chinese urban areas.

The researchers mathematically modeled these factors according to population growth to see how each respond when more people move to a city. They found that human needs, such as employment, utility consumption and housing, correspond directly with the population: As the number of people doubles so does the need for housing, jobs and electricity infrastructure, which encompasses the number of roads, gasoline stations and the like already in place and does not necessarily keep pace with individual growth—the ratio of user to facility simply rises. (And so, for example, there are simply more customers at the available gas stations.) At the other extreme, researchers found that increases in social activity and production outpace population growth. In other words, if the number of city denizens doubles, these factors—both negative (crime) and positive (wealth creation, total wages and gross domestic product)—will more than double.

“These scaling laws give you some suggestion of …[how] … your city will behave as it grows,” in terms of economic activity, resource consumption, etc., Bettencourt says, adding that smaller cities, like Portland, Ore., and huge epicenters, like New York City, fall along the same continuum and are subject to the same multipliers.

“The practical application of this work is that the problem is not large cities, the problem is the conditions in which some people live in large cities,” says study co-author Jose Lobo, an economist at A.S.U.’s School of Sustainability in Tempe. “Policies should be directed to making large cities more livable”—for instance, enacting legislation or spending money to alleviate poverty and crime, the negative effects of growth.

Thomas Parris, director of sustainability programs at iSciences, a Burlington, VT, research company dedicated to improving understanding of sustainability, agrees that the main message of the paper is a recharacterization of cities so that better decisions can be made as urban areas continue to grow. “This is a fascinating paper that quantitatively explores the complex interactions between urbanization, sustainability and social innovation,” he says. “Insights, such as those presented in this paper, will help guide our collective choices as the pace of socioecological change accelerates.”

There is something in the nature of the world that it is sometimes paradoxically more difficult to make small changes than to make big ones. Logically consistent big changes are more likely to succeed because of the interconnectedness of the world.

At times, big changes are forced on the system from external shocks which make the transition unavoidable because the old order is destroyed. It is suggested that around sixty-five million years ago, the Cretaceous-Tertiary mass extinction (referred to as the K-T event) where 70 percent of all living species disappeared was the result of an external shock which was delivered by a 10-km diameter chondritic asteroid slamming into the earth. That extinction destroyed the dinosaurs but cleared the land for the rise of the mammals – we belong to that class. Less dramatically but more palpably, India was forced to liberalize its economy when the external shock to the system arrived in the form of an external balance of payment crisis.

India is unlikely to face an exogenous shock to the system large enough to force it to build the cities that it needs for the hundreds of millions who are currently trapped in villages. The existing cities are dying and although the situation within them is dire and unbearable, it is the result of continuous adjustment to gradually worsening conditions over a sufficiently long period. These cities will not collapse in the next few years but if if present trends continue, in a decade or so, they will be dead. It is better to consider alternative plans now rather than when the collapse eventually happens.

In this series on the need for the urbanization of India’s population, I have explored the idea of deliberately building new well-planned efficient beautiful livable cities. I am convinced that it is possible to do so even in the face of the obvious challenges that such a gigantic undertaking would entail. I believe that the resources that are required will be created during the process of building the cities.

Cities generate wealth. That is, they produce stuff. That wealth itself can be used to produce the cities that generate even more wealth. With only a relatively little amount of resources but with a lot of gumption, one can start a process – a self-catalytic process – which can most certainly engage the considerable talents and resources of the country. Like the vision which impelled a nation to seek political freedom, the time is high that a bold vision was outlined for the nation for economic freedom. It is time to think big because the Indian people have what it takes to make a big vision a reality. We have done it in the past – over two and a half thousand years ago with cities like Harappa and Mohenjo-daro.

I conclude with the words of a great visionary and urban planner, Daniel Burnham (1846 – 1912).

Make no little plans. They have no magic to stir men’s blood and probably themselves will not be realized. Make big plans; aim high in hope and work, remembering that a noble, logical diagram once recorded will never die, but long after we are gone will be a living thing, asserting itself with ever-growing insistency. Remember that our sons and grandsons are going to do things that would stagger us. Let your watchword be order and your beacon beauty. Think big.

[This concludes the ten-part series. You will find the entire series and previous posts on the subject in the category "Cities and Urbanization." ]

“It began with a simple realization that no one is as smart as we are. That is, a collection of very smart people is smarter than any one person however smart. Experts and expertise matters, and therefore amateurs and novices cannot be as good in figuring out the choices that confronted them. The collective wisdom of a group of smart people articulated a vision and an associated roadmap.”

Who were they?

“The best. From every field such as industry and business, development, economic growth, urban planning, resource management, science, technology, governance, finance, etc, they got the best from around India and the world. They got the most successful entrepreneurs and business tycoons to add to the group of experts. They got the most respected academics. The challenge to this group was simple: what is the best way for a large economy to transform itself given the resources available? The expert committee took their time and in one year came up with a recommendation.”

How much did it cost, this bunch of experts? And why experts? Don’t we know that amateurs do make amazing contributions?

“That was the problem. India was stumbling around because every amateur and his brother was coming up with vision which with 2020 hindsight we can say was … how shall I put it … amateurish. It had become a cottage industry of sorts. Sit around, write a book, and there was the so-called vision. That changed when a few industry leaders said enough is enough. They got together and put in I think some paltry sum, I guess around $10 million to convene this panel of experts. And then they aggressively sold the goal to the country. Of course, they did not do it for altruistic reasons. They all became fabulously wealthy from the accompanying growth. But that is another story.”

Surely, $10 million is not paltry?

“Actually it is. If you consider that the spending was crucial in generating more than $10 trillion of wealth which would not have otherwise happened, that is what makes it paltry. Do the arithmetic.”

And the recommendation was?

“Like I said, cities. Transform India by building new cities designed and built using the best planning. Just by credibly committing to build these, it engaged every resource available. Recall that India was a very “young” country demographically. The people came from there. The capital came from everywhere. Businesses around the world realized that here was a market that the world had never seen. There was a mad rush to invest in India. On average, US$1 billion a day was the foreign direct investment for the last 10 years. India mopped up a significant part of the investment that used to flow into the US and China. So it was not just internal resources but global resources that flowed into India.”

But why didn’t that happen before?

“India was there at the right time. The demographics were right. But until the credible commitment to actual economic growth was made, there was no reason for investors to invest in India. So when that commitment was made, it galvanized everyone. See, the thing is that wealth is created by human action. But human action is goal directed. Setting a good goal requires deep thinking, not political amateurism. If the person doing the thinking for the country is an illiterate scamster, you are in trouble.

“But if skilled people put their minds together and set the agenda, then the goal is interesting enough, difficult enough, rewarding enough to channel all sorts of resources to its fulfillment. It creates it own dynamic, like a forest fire. The more it grows, the more resources it sucks out from the surrounding and grows even more. The wind feeds a forest fire while the same wind would snuff out a candle. To make use of the winds of change, we needed a forest fire, not a candle which we were protecting from the wind that far.”

So how does one start a forest fire?

[This is part nine of a ten-part series. You will find the entire series and previous posts on the subject in the category "Cities and Urbanization." ]

The year is 2020. For nearly 12 years, India has seen an average annual GDP growth rate of over 12 percent more than quadrupling the per capita GDP from US$500 in 2008 to $2000, placing India in the league of middle-income economies. Stark poverty is a thing of the past. In much less than a generation, the population transitioned from being 70 percent rural to being less than 20 percent rural. Agricultural labor is only 15 percent of total labor participation, down from 60 percent in 2008. Farm incomes are six times what they used to be. The $3 trillion economy shows no signs of slowing down.

So how did this seemingly impossible transformation happen, I asked the man on the street.

“The cities. I am hazy about the details but it appears that there was a change of tack. Somehow they figured that they had to think different, think big. They had been stuck in a rut created by a poverty of imagination. The problem was that there was no compelling vision to light a fire in the bellies of the hundreds of millions of people. Then somehow inexplicably they got out of the rut.”

Can you be a bit more specific? What was the turning point? What did they specifically do? What made the difference? Who was responsible?

“I was coming to that. Like I said it was the cities. But that was just the instrument, just the visible part of the transformation. The creation of the cities was the equivalent of the challenge to land a man on the moon. Remember all that talk about an Indian manned mission to the moon? Well, how lunatic was that? Nothing new in attempting to do in 2012 what the Americans had done over 40 years ago. Not just that, with all their trillions of dollars, the Americans themselves thought it was a pointless waste of money to keep doing manned missions to the moon. And yet, impoverished India was willing to spend a few billion dollars repeating that. I ask you, how retarded is that?”

Why drag in all this talk about missions to the moon?

“Actually, think about it for a second. The challenge that JFK presented to the nation was the important bit. Recall his words. Quote: We choose to go to the moon. We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too. Unquote. You must read that speech to get a sense of what the articulation of a real vision is all about.

“The bit about doing something not because it is easy but because it is hard is important. And the bit about choosing. The operative word is “choosing” – you choose to do this as opposed to that. The Indians finally woke and decided to choose. It was a choice. They thought through what the options were and then made a choice to do what made the most sense. And the choice they made best organized their resources and their skills.”

But tell me, how did it all begin.

[This is part eight of a ten-part series. You will find the entire series and previous posts on the subject in the category "Cities and Urbanization." ]

With the growth of the cities, demand for labor went up. The labor for construction of Pune DeCi came primarily from the agricultural sector which had become highly productive and therefore released labor in non-agricultural sectors such as services and manufacturing. The building of the city thus provided employment and the wage goods required for the labor came from the high productivity farms around. Thus even though the economy of the region was growing at a very fast rate, there was no inflation.

People started living in the new well-designed apartments in high rises located in well-planned neighborhoods littered with parks and other amenities. Pune DeCi grew rapidly as all sorts of service providers moved in, from schools to shopping arcades to banks to bakeries. Manufacturing kept pace with increased demand and thus provided sufficient incomes to the workers who were able to purchase the products of the manufacturing units. The demand for services went up. Thus demand for education provided employment to teachers, who used their incomes to buy housing and food, which provided employment to the construction industries and farmers, and so on.

It is a long story. The title of the story was “Urbanization Demand Led Economic Growth.” Another way to look at it is to consider it the equivalent of a “Marshall Plan” which the US put together at the end of the Second World War for the reconstruction of Western Europe. By aiding in the reconstruction, the US helped build capacity in Europe. But as a side-effect, it provided employment to Americans within America to supply the goods that Europe needed. And when Europe regained its feet, it was a ready market for American goods and services, and became its biggest trading partner.

India needs a Marshall Plan where the urban part helps construct cities for the rural part. In the next bit, I will explore what needs to be done for creating one.

[This is part seven of a ten-part series. You will find the entire series and previous posts on the subject in the category "Cities and Urbanization." ]

Malls come in different sizes in the US. There is the Great Mall of America, for instance, along interstate 880 in the SF Bay Area, occupying a few hundred acres. Then you have the humongous mall in Nevada occupying thousands of acres better known as Las Vegas. The general pattern is straightforward. Some developer buys a large tract of land, gets into agreements with a few “anchor” stores such as JC Penny or Macys, builds the mall, and the rest of the stores and other service providers such as fast food restaurants and movie theaters follow dutifully. In the case of Las Vegas, the anchor stores are the casinos and hotels. It is important to recognize that malls, large and small, are micro-cities whose economy is entirely service based, not based on manufacturing or agricultural production. But there is absolutely no reason that you cannot use the same micro-city model and blow it up to the size of a city and base the economy of the city a combination of manufacturing and services.

The basic model is simple. First, acquire a sufficiently large piece of cheap land. Second, make improvements on it such as adding utilities, roads and buildings. Third, get a few big commercial interests to locate themselves on this land. Finally, sell or rent subdivisions of the “improved” land to whoever wants it at such a price that you internalize the positive externalities you created by improving the land and coordinating the co-location of numerous businesses on the property. The profits made by the developer accounts for only a small fraction of the total wealth created by the process.

The same process can be followed for creating the designer cities that India needs by the hundreds. Briefly, a sufficiently large, perhaps 10 kilometer square, cheap land is acquired by a “developer.” The developer could be a public-private consortium. The developer then persuades some “anchor tenants” sufficiently large to give credibility to the later arrivals that this will be a going concern. Improvements on the land are begun and as the work proceeds stage by stage, smaller bits are sold off to interested parties to pay for the on-going improvements on the land.

In the next bit, let’s explore this a bit more with a hypothetical example.

[This is part six of a ten-part series. You will find the entire series and previous posts on the subject in the category "Cities and Urbanization." ]

India’s development needs to expand its scope. Not only does it need to go beyond IT & ITES and expand broadly into Manufacturing, it also needs to expand geographically out of the 3-5 major commercial hubs.

A simple math of each mega hub serving an average of 10 Million people, would indicate that with 10 of these, India can tackle 10% of the population.

Beyond that, we’re looking at the third tier cities, which, let’s say could service 5 Million people average, and if we can scale 20 of these, we have a solution for another 10%.

Atanu Dey’s RISC model says: “The total rural population of India can be covered by about 6,000 RISCs each servicing the needs of approximately 100,000 people. By providing a full complement of services, RISC creates a ‘micro-city’ which seeds the formation of a city by drawing to it the population from the surrounding areas.” An example of a RISC is Jamshedpur, Tata’s flagship steel town.

Once we have exhausted the third-tier cities, the next level of development would require looking into the RISC towns. But that’s still another 20 years away, unfortunately.

To build the Designer Cities, the DeCis, we need land, labor, capital, and technology. The technology exists. Over the centuries people have figured out how to design and build efficient, effective, and pleasant cities. We do have the land and sufficient labor to get any job done—with a bit of training of the labor, of course. The capital is the last and most critical bit. We just need to shift our perspective and consider the city to be a massive factory for producing wealth. Once you do that, you immediately see that the money spent on building a city is not expenditure but an investment. Therefore if we demonstrate that the return on investment is positive in the case of a city, investors will go for it.

The most important bit is to bring all the factors of production and the technology together simultaneously. It essentially is the solving of what is called a “coordination problem.” If you can sequence the set of operations properly, you can build using the existing factors in such a way that every stage generates the wealth that you need to move up to the next stage. It is an upward spiral. If you do need to borrow for the first stage, you figure out some innovative financing mechanism.

The first stage is the acquisition of land. There are enough examples of how land can be the foundation upon which you can build vibrant communities. It is just a small step from that to building entire cities using the same method, as we will explore next.

[This is part five of a ten-part series. You will find the entire series and previous posts on the subject in the category "Cities and Urbanization." ]

Let’s first distinguish between an expense and an investment. When you buy a productive asset or what is called capital asset, it is not an expense, it is an investment. You may have to borrow money to buy the asset but if you have chosen wisely, your asset will produce enough wealth for you to repay the loan in due course and you end up with the capital asset. What you need is the smarts to use the asset to increase your productivity. The capital asset may be as trivial as a cell phone that a vegetable seller uses to increase his sales. Or it could be as massive as “buying” a city to increase the productivity of millions of people.

The money spent in human capacity building – also known as education – is an excellent example for distinguishing between an expense and investment. The raw material is the basic human brain. The money spent transforms the raw brain into a trained brain. If the lifetime earnings of the trained brain exceeds that of the raw brain by at least the cost of the education, then you would say that the return on that investment (ROI) is positive. It is an empirically verifiable fact that the ROI for education is positive because investment on education has persisted for centuries. If the returns were non-positive, the market would have selected education out for extinction.

Modern factories are another example of a capital investment which create new wealth. Simply put, factories increase the productivity of the people. Which means that more stuff gets produced using the same or lesser effort. The increased production is more than what it took to create the factory in the first place. That is why factories persist.

A city, I submit, is capital equipment just like a machine or a factory. Only difference is that it is large. And while the cost of a city is large, so is the wealth that it creates. Therefore, theoretically at least, it is possible to “buy” a city on borrowed money and then pay back the loan from the increased income that comes from the working of the city. That is the secret of creating wealth out of thin air.

[This is part four of a ten-part series. You will find the entire series and previous posts on the subject in the category "Cities and Urbanization." ]

The Designer City, or DeCi, is the result of planning but not centralized government planning. In the case of the DeCis, the planning corresponds to figuring out the overall rules of the game, not the game itself. The game evolves through the participation of the players playing according to those rules. All of life is in some sense a game which organically evolves from a small set of simple rules. As much as we are compelled to play the game of life according to the rules derived from Darwinian evolution, we are also compelled to play the game of economic life according to man-made rules. If we have, for whatever reasons, a good set of rules, the resulting game is enjoyable. If we get the rule-set wrong, we suffer economic hardship.

Let’s take one example. If the rules do not allow very tall structures, then the footprint of the housing required for a certain population will be very high, leaving little land for parks and roads. But if the rule merely outlined how much open area must accompany how much built up area and for how many people, then how tall the structures that finally emerge will be dictated by an optimization process which would include the constraints imposed by the cost of construction, the demand for living space, and other factors that no central planner can foresee.

There is a role for government planning, of course. But the level at which the plan is conceived and the granularity of the plan are related. Take for example, an airport. The decision to have an airport, and where to locate it, is part of the planning at the level of the government of the city which the airport will serve. Which private party is actually assigned — or wins the bid — to build the airport is left to market forces and a set of rules. The actual plan for the airport, its capacity etc, must be determined by the private party, not some government bureaucrat who probably did not ever set foot in a well-designed airport. The builder can figure out the details which don’t concern the government. The builder can also figure out how the airport will be financed and how they will recover the investment. This they will do based on what the anticipated demand is, and will be in the future, for air transportation. People whose business it is to build airports know about these things. Otherwise they would not be able to survive in the business.

[This is part three of a ten-part series. You will find the entire series and previous posts on the subject in the category "Cities and Urbanization." ]

By living in high density high-rises, we free up space within the city for lush greenery and roads for movement of goods and people. There are no traffic problems because of two factors. First, we have a compact and efficient city. The maximum commute is only 10 kilometers and that too on wide un-congested streets. You can use your bicycle if you don’t wish to take the excellent light-rail free public transportation system. Of course, some people own cars but most don’t because cars cost about five times what they used to cost. They figured out that internalizing the costs of the negative externalities of private cars gives socially optimal results.

The second reason for our lack of traffic problems is that the city was designed in such a way that it cuts down on needless moving about. The master plan was a marvel of urban planning. Over the centuries, people have learnt a lot about how cities work and how to design them so that they are aesthetically pleasing, comfortable for living and working in, and economically efficient. Most of what you need for daily living, you can get by just walking around. Shopping complexes are scattered all across the city, as are offices, schools, parks, entertainment facilities, gyms, medical facilities, and various public facilities.

Though compact, our city is not crowded at all. We have tons of open public spaces such as parks and swimming pools. Being compact, all our public utilities are very efficiently provided. From garbage disposal to recycling of water and waste – everything has been carefully thought of. Nothing was ad hoc and haphazard as you had in your old cities. We have large artificial bodies of water where rain water is collected. These supply all water related services and water is efficiently recycled. The widespread availability of clean and free drinking water everywhere itself improved public health immensely.

Our city has the usual collection of offices and other service oriented workplaces within the city. But at the outskirts of the city, we have manufacturing facilities, farms, and other such facilities that don’t have to be within the city. For example, our airport is outside the city but within reach of our fast light-rail system. Our main railway station is however underground at the city center. You can ride your bicycle – did I mention the fine bike paths we have? – to the train station, park it there, and take a high-speed train to the next DeCi about 100 kms away.

Strategically located outside our city is our pride and joy: the power plant. Using the best available technology and the most appropriate fuel, it generates all the electricity we use. And we use a lot of it. But the capacity planning is so good that we never have power shortages. We have power to run our factories, offices and homes. Of course, all our facilities are designed such that we make the most use of the free solar radiation. We use the latest advances in solar photovoltaics to meet our power needs to the extent it is dictated by economics.

How did all this happen? This sounds as if your DeCi represents not a dream but a nightmare right out of Central Planning. Tell me it ain’t so.

[This is part two of a ten-part series. You will find the entire series and previous posts on the subject in the category "Cities and Urbanization." ]

“Some of these cities appear to have been built based on a well-developed plan. The streets of major cities such as Mohenjo-daro and Harappa were paved and were laid out at right angles (and aligned north, south, east or west) in a grid pattern with a hierarchy of streets (commercial boulevards to small residential alleyways), somewhat comparable to that of present day New York. The houses were protected from noise, odors, and thieves, and had their own wells, and sanitation. And the cities had drainage, large granaries, water tanks, and well-developed urban sanitation,” the Wikipedia article on urban planning says.

What is even more astonishing is that now, two and a half millennia later, most of the current inhabitants of land of Harappa and Mohenjo-daro civilization live not in well planned cities but in tiny little impoverished villages, and some in unplanned congested mega-slums. The shame of the whole thing is that as a collective not only have they lost the knowledge of what cities mean but they don’t even dream of building and inhabiting cities. One wonders when the regression started and what led to the death of the spirit that built those ancient cities. Something snuffed out the spirit, something killed those dreams, something made the inheritors of such great vision and accomplishment into myopic poverty-stricken masses living in misery, huddled into very primitive small villages.

The world – or at least some parts of it – has moved on. They have built many wonderful cities, much grander in scale than Mohenjo-daro and Harappa. Over the centuries, human civilization has progressed pari passu with the development of cities. Immense understanding and knowledge of what works and what doesn’t in city planning has accumulated.

With a modest investment in airline tickets, our leaders can visit great cities and see them with their own eyes. They don’t even have to imagine. Yet they refuse to dream or perhaps they are incapable of dreaming. Perhaps they are too busy with their incessant bickering over who gets how much of the little pie of material wealth that is created. Their mental poverty doesn’t afford them the luxury of dreams. They just want a little bit more, not something better. Their vision has narrowed to focus on how to continue to live in villages. I have yet to hear or read of even one leader of India calling for the creation of great well-planned beautiful cities. More shameful than our material poverty is the poverty of our imagination and aspirations.

We have the power to imagine a different future even if our leaders don’t. Using our collective wisdom and skills, we have the power to dream big. More importantly, having dreamt the seemingly impossible dream, we have the power to make that dream a reality. We need to ask the question: if not us, who else?

[This is part one of a ten-part series to be published in the next ten days. You will find the entire series and previous posts on the subject in the category "Cities and Urbanization." ]

Talking fish is not the point of the little story, of course. I find it remarkable that we often miss what we take for granted, and don’t question what we are perpetually immersed in. What explains the unreasonable success of cities is not something that we ponder casually, even though virtually every one of us lives and earns one’s livelihood in one.

The Success of Cities

Let’s examine “the unreasonable success of cities” first. Success of cities compared to what? Compared to the success of non-cities, or villages. In other words, we need to inquire into the success of urban areas relative to non-urban areas. Practically every advance in human understanding and ability occurred in urban locations. Look carefully into the genesis of any human artifact or idea and you will eventually find that it arose from the activities of humans in large aggregations of people.

The amazingly complex hardware and software that I am using to write this piece was not conceived of, developed, manufactured, and improved upon in some small little village somewhere in the back of beyond. The network of computer networks, the Internet, was not developed for or by people who lived and worked in isolated small pockets of humanity. Like all advances in science and technology, that network was the result of the network of networks of a large number of people of urban areas. The power of networks and network effects is surprising.

Complex Adaptive Systems

There is something that emerges from the activities of a large number of people interacting in close proximity that must have something to do with the fact that nearly all human advances are rooted in urban areas. Theoretical advances in the study of what is called “complex adaptive systems” throw some light on this emergent phenomenon. I think it is instructive to learn a bit about CAS because it helps us comprehend a wide range of interesting subjects.

Complex adaptive systems are composed of a diverse set of a large number of independent entities called ‘agents’ which are aggregated (either physically or logically) through some mechanism, and they interact within the framework of a simple set of rules, and from these interactions and interdependencies emerges a system which has properties that are greater than the sum of the interacting parts.

That is one heck of a long sentence. I can’t believe that I actually wrote that. I could try to break it up into simpler bits but it would lose some coherence. Let’s just move on.

The basic idea is that what comes out of a city of 100,000 people is somehow more than what comes out of a hundred villages of 1,000 people each. Or consider this: the physical co-location of five colleges (Sciences, Engineering, Humanities, Law, and Medicine) with their dozens of departments into a single university campus makes things happen such as would not happen if these departments and colleges were scattered over hundreds of locations. Theoretical reasoning about the advantages of aggregation (aggregation economies) is lent empirical support by the success of, say, the Silicon Valley in California.

Scale and Diversity Matter

Scale matters in pretty much every aspect of human action. Take manufacturing, for instance. Most of the things that make life comfortable have not only come out of cities with its aggregation of people, but they are manufactured in factories which give rise to scale economies. Factories depend on the availability of a large number of people with diverse skills using highly sophisticated capital equipment. This imposes the constraint that where such manpower is not available, manufacturing cannot take place. Both diversity and scale matter. The average cost of a car or a PC manufactured in lots of hundred would be many times that of a car or PC manufactured in lots of millions. Mass production is at the core of the fantastic economic success of economies, and it fundamentally depends on scale economies. Try manufacturing anything at the scale of a small village, and it would be soon become apparent that the economics just doesn’t work out.

It should become fairly obvious that there is a relationship between the performance of an economy and what the structure of population distribution is. If the population is distributed into an immensely large number of small habitations (villages), then the cost of producing stuff is high; conversely if an economy has most of its productive assets in denser urban locations (cities), productivity and production is high, and consequently the average income is correspondingly high.

There is no escaping the conclusion that urbanization and economic growth are conjoined twins, as I have been arguing in this series. For the development of India, we need economic growth. For economic growth, we need the urbanization of the people. But they cannot be urbanized into the current cities given the state of the cities. Nor can they be urbanized in the 600,000 villages where the current majority – estimated 700 million — of Indians live. For decades the futile exercise of developing villages has been attempted and with results that a bit of thinking through the issues would have predicted. The policy makers of India are trapped into a wrong way of thinking and unless the old mind-set changes, the struggle to lift hundreds of millions will be needlessly made more difficult than it already is.

Village Development Doesn’t Matter

It is reasonable to ask why the continued fascination with village-centric development even though experience has demonstrated that developing villages is neither economically feasible nor is it desirable. It is not feasible firstly because it is too costly to get anything done at that scale. Secondly, if it were a matter of a few hundred villages, we could have said to hell with economic efficiency, let’s just do it. But when you have more than half a million villages, that is out of the question.

Village centric development is not desirable because people don’t desire to live in villages. They are forced to, of course, but given a chance they will migrate. Cities offer opportunities that villages don’t. Here is a simple thought experiment. We do have the option of living in a village but we don’t. That shows that at least for us, cities offer greater variety and freedom than villages do. Is there any reason to believe that those currently forced to live in villages will continue to live there if the option of living in a city were available to them?

Then why do the movers and shakers continue to believe in village-centric growth and development? I am assuming that they believe in it because they are spending inordinate amounts of money in attempting that. I think there could be two non-mutually exclusive reasons. First, they may be simply ignorant. They have been fed lies about the wonderful romantic life in villages, of idyllic simplicity and humanity, of an existence imbued with a gentle communion with nature, and other such hogwash. They don’t have to live in villages and they don’t have the imagination and the empathy to realize that Indian village life may not be all that it is cracked up to be.

Second, it may be that using the excuse of funding village development, people up and down the administrative and political chain enjoy the perks of handling lots of money with very sticky fingers. Rural development is a socially costly exercise but privately it is enormously profitable. Everyone loves a good village development scheme, to paraphrase Sainath.

More to come

I think it is time to take a break. I will not spend any more time arguing that the fate of the rural population of India is tied with the growth of new cities in India. I will take that as read as I have written about it in the previous three posts. (See 1. Inclusive Economic Growth, 2. India-The Land of Endless Opportunities, 3. The Urbanization Leap.) In the next post, my objective will be simply to outline how these new cities can be built, who will pay for them, and how long will it take.

One final word. I am not under any illusion that what I have been advocating will ever see the light of day. This is just a blog and I am writing this for my own edification. Our leaders are too busy dividing up the tiny little pie, and worrying incessantly which favored ethnic, religious, or socio-economic group would be best wooed for their votes. Some of them appear to believe that adding more taxes is the best way to solve problems. Education not happening? Why, just add a tax here and a cess there, and it will magically happen! They have neither the time nor the inclination, or the required training to ever analyze what went wrong and why, and what should be done differently. They make a living talking about and spending money on development. Like the fish, they are blissfully unaware of what water is.

Until the next time, when we will meet again and the case is sol-ved, goodbye.

Why is that so? Because of scale economies, as economists say. Given a large enough population at a specific location, the demand for education will be sufficient for its efficient supply. And to supply the large amount of educational services, you need a large number of people. These people in turn need non-educational services and they are also provided by other people in that location. To provide these services you need infrastructure—power, telecommunications, houses, parks, roads, water, sanitation, etc. To provide all the infrastructural services, you need yet more specialized people. Following this line of reasoning you soon reach the conclusion that it needs a city. It needs a city because a city is at the heart of a developed modern complex highly skilled highly specialized economy. See any developed and rich economy, and you will see that it is primarily a collection of cities.

You can of course have an economy based on a large collection of villages. For most of recorded history, economies have been just that, village-based, agrarian, and poor. They were not modern, efficient, or rich. Of course, you don’t have to be modern, efficient, and rich. You can choose to be traditional, inefficient, and poor. A Gandhian economy, in other words. An economy which is centered on “self-sufficient” villages is quite feasible. The best part is that one has the choice to live in self-sufficient villages. Very few people choose to do so, however. That suggests that there are very few true Gandhians among the general population. Somehow people appear to prefer the material comforts and opportunities of city living over the smug satisfaction of living a life of poverty and moral superiority in small villages. At the first opportunity, people from villages migrate to cities, and they prefer to do this even though they often end up living in slums within cities. They reveal their preferences by voting with their feet.

It is important to ask and answer the question why people prefer cities. Here is my tentative answer. It has to do with freedom. People somehow have an innate desire for freedom. They want to have the freedom to be who they are and have the potential of becoming. Cities provide us with degrees of freedom that villages seldom do. Not just economic freedom in terms of earning a living most conducive to our abilities and aspirations, but more importantly social freedom. Of course volumes have been written about the dehumanizing anonymity of cities. But there has to be a good reason for why this so-called “dehumanized existence” of urban living is preferred by so many around the world and in all times since cities came into being. Perhaps it is the drive for freedom that impels the population to live in cities that provide them freedom.

I am sure that there are those who have a romantic attachment to village life. I am also fairly certain that anyone reading this who has romantic notions of living in a village actually lives in a city. The luxury of an imaginary idyllic village existence can only be afforded from the comfort of an armchair somewhere in an urban area.

With that brief (heh!) introduction, it is time to get on with what we have been discussing in previous two posts (“Inclusive Economic Growth” and “The Land of Endless Opportunities.”)

The argument so far: India needs economic growth for development to occur; for economic growth, urbanization of the majority of the population currently living in 600,000 small villages is a necessity; the current urban centers cannot accommodate the present urban population adequately, leave alone taking on any additional burden. Hence the proposition has forced itself on us: we need new urban centers to accommodate the hundreds of millions who must get out of villages for India’s economic growth.

So the next time I will delve into the simple matter of how we can actually create new cities in India. It will not be a blueprint for economic growth, but rather the outline of a strategic plan. I will argue that it is possible to engineer cities that can liberate the hundreds of millions held captive in the dismal little villages of India. Creating these cities would essentially leapfrog India from being largely a village-based poor economy to being a modern affluent economy, and thus allowing the hundreds of millions currently living in villages to bypass the intermediate state of migrating to the slums of ill-planned congested cities.

[Next in the series: Cities as Complex Adaptive Systems.]

My view is that the problem of rural development has to focus on the development of rural people, not the development of villages. Villages are not the proper object of analysis when it comes to economic growth, and hence economic development. By insisting on the development of villages, scarce resources, which could have been more efficiently used elsewhere, are wasted. There is another way of using the same resources, and that is the development of cities. It seems to me that the answer to rural development lies in urban development. Paradoxical but true.

About 70 percent, or 700 million Indians, live in villages. Clearly, there is no possibility of urbanizing them by migrating them to the existing cities which are already bursting at the seams. All of the major cities are little more than mega-slums. Practically all Indian towns and cities are unplanned and inefficiently use land and other resources. They are arguably inadequate for the current residents, leave alone adding hundreds of millions more people to them. The existing urban centers would do with a massive makeover but we cannot afford that. (Fires, earthquakes, carpet bombings have benefited many other cities in the past.) So there is clearly a need to have new urban centers to accommodate the hundreds of millions of people who need to be in cities for economic growth and development. And that is the greatest opportunity that India provides to everyone–people rural and urban, firms domestic and foreign, governments, NGOs, multinational entities . . . the list goes on.

Imagine building absolutely new cities from scratch for 600 million people. Imagine 600 new large cities of one million people each. Imagine building houses, schools, shopping centers, parks, factories, roads, public utilities, hospitals, libraries, . . . And now imagine doing that using the best urban planning known to humanity. Take whatever humanity knows about the best way to get things done, and use that to design and build cities that can develop and sustain the people for generations.

That is the greatest opportunity we have – of building from scratch – which is not available to any developed economy. Take for instance the US. US cities are the notoriously inefficient in terms of resource use and sustainability. Practically all Americans live in cities and if you were to build new, more efficient cities, you will have the greatest difficulty populating them because people will be reluctant to move from their home cities. Their legacy urban centers will burden the transition to living in more sustainable cities. Contrast that with India. Most Indians living in villages would love to have the chance of living in well-designed efficient cities.

Allow me to illustrate that last point with an analogy from a different sphere. The US had one of the best landline based telecommunications system in the world by the early 1970’s. That legacy system actually prevented them from transitioning to a more efficient mobile telephony system in the 1990’s. India, given that there was no landline telecommunications system to speak of, immediately leapfrogged the twisted copper-wire stage and went straight to the more efficient wireless system.

What I am proposing is a similar “urbanization leap” for the majority of Indians. Instead of futzing around in the margins with trying to make the villages a little better, take a bold step and create the world’s most efficient cities. I know, it is more than slightly crazy to say that we can do something that others have struggled with for many decades. But I submit that it is not only possible but also possible in a surprisingly short time. What we need to do is to think differently.

What we in India need is not so much hard resources as we need a bold compelling vision. We need the vision to look beyond the here and now, and see the future. If we have a bold, coherent, inspiring and realistic vision of the future, it will serve as the guide to purposeful action. I bet you are justifiably skeptical of my claim that we can work miracles. But I will argue in a future post how it can be done, and done with ease. Stay tuned.

[Continued at "The Urbanization Leap."]

ISB at night [source]

Recently I was on a panel discussion titled “Business Strategies for Inclusive Economic Growth” held during the semi-final round of the Global Social Venture Competition at the Indian School of Business in Hyderabad on the 9th and 10th of March. The panel–moderated by my friend Dr Reuben Abraham–included Mr Varun Sahni of Acumen Fund, Mr K Krishan of Malavalli Power Plant Pvt Ltd, and Arjun Uppal of the IFMR Trust.

You and I—and those who were gathered at the GSVC event—are exceptional. We live in cities, engage in non-agricultural work, and earn far more than what the average Indian earns. The vast majority of Indians live in villages, and eek out a meager existence from agricultural related labor. We tend to forget the fact that our economic prosperity and our lives in urban India are correlated. Therefore if the goal is India’s economic prosperity, somehow the 700 million living in some 600,000 villages of India have to have the same option of living and working in urban India on jobs in non-agricultural sectors.

Do we want the reality of today’s India to persist into the future, a generation or two hence? Or do we want a future where the majority of Indians are urbanized and are engaged in highly productive non-agricultural sectors? We can choose, and having chosen, we can actually make that future happen.

I think it is fair to assume a broad consensus on that development is a good thing. Of course, development and economic growth are not the same thing. You can have one without the other. For a very materially rich society, development does not require economic growth. It is possible to appropriately channel resources towards development, an exercise in greater allocative efficiency if the resources are available in plenty. But in a materially poor society, merely changing the allocation of resources is not likely to be sufficient. There you have to have increased production, in addition to the problem of efficient allocation of what is produced. The US, for instance, has a per capita annual income of around $28,000. Extreme variance in incomes and wealth can be reduced with appropriate redistributive mechanisms. Contrast that with India. Yes, there are a lot of very poor people in India. Even perfectly distributing the national income leaves everyone pretty poor. The conclusion is hard to avoid: India needs economic growth for development.

Economic growth is both a cause and consequence of urbanization. The reason is simple. Cities are the engines of growth. The high population and population densities of cities reduce “transaction costs.” Services are cheaper (as compared to the same in rural areas) because infrastructure is less costly because of scale economies. That is, infrastructure have high fixed costs and investment in infrastructure is lumpy. The high aggregate demand and supply of infrastructure in urban areas makes lower prices possible.

So the logic so far: economic development of India requires economic growth. Cities are engines of growth because there is a bi-directional link between urbanization and growth. Therefore the rural people have to be urbanized for India’s development and growth. Every economy has followed that path which begins with agriculture being the main source of income for the majority of the population and ends with agricultural employment being a very small fraction of the total labor force.

In my considered opinion, the problem with India’s rural development has been that the focus has been on the development of rural areas, not rural people. The policy makers have been focusing on the wrong goal, that of village development. It is silly to attempt to develop 600,000 villages because it cannot be done. The future is deserted villages because people vote with their feet when they get the chance to move to a city. Only in very rich economies do people have the resources to live comfortably in villages. India cannot afford to live in villages; it is not that rich.

[Continued at "India--the Land of Endless Opportunities".]

Mukesh Ambani apparently gets it.

The 17th July edition of Newsweek International carries a must-read article on Mukesh “Mr Big” Ambani’s Makeover Plan for the Nation. The article says that Mukesh

has finalized plans to invest more than $11 billion over the next decade to build two new satellite cities outside creaking, overcrowded Mumbai and Delhi. He foresees these metropolises emerging within just four years, each with a population of 5 million people making $5,000 a year, on average (or seven times India’s norm), and hosting top multinational companies. And that is all pretty simple—a development on steroids—compared with the idea that really gets Ambani going.

Ambani’s favorite scheme aims to revolutionize in one swoop two of India’s largest but most backward sectors: farming and retail. . . . Ambani plans to invest $5 billion by 2011 to put both the farms and the stores on the road to modernity, connect them through a distribution system guided by the latest logistics technology, and create enough of a surplus to generate $20 billion in agricultural exports annually.

Further down in the article, it says

Ambani wants to build a chain of both small and supersize stores across India, creating 1 million jobs and reaching $25 billion in annual sales, all by 2011. If his plan succeeds, he says, consumers will get fresher food at lower prices, rural incomes will soar, farmers will become active consumers, and Reliance will become “a WalMart in India.”

And finally

To transform Indian farmers into quality suppliers for his new retail chain, Ambani plans to create 1,600 farm-supply hubs across India, providing technical know-how and credit, selling seeds, fertilizer and fuel, and buying produce. He also plans to build some 85 logistics centers to move food to retail outlets and to ports and airports for export.

See why I say that it appears as if the man gets it?

First, he talks about creating cities. Cities are the engines of growth since it is an urbanized population which has the productive capacity to create economic wealth and thus lead to development. India’s largely rural population has to be urbanized and since the existing cities are basically incapable of absorbing the population, new cities have to be developed.

Second, he talks about transforming agriculture by raising its productivity. Building a large number of farm-supply hubs will make the supply chain for agricultural inputs more efficient. Raising agricultural productivity will not only increase production but will also release farm labor which can then migrate to the cities and produce non-agricultural goods and services.

Third, the farm output will be more efficiently brought to the market. It is estimated that around 40 percent of farm produce never reaches the consumer. Introducing efficiencies in the supply chain of farm output and retailing it efficiently will translate into lower prices for consumers and higher realized prices for the farmers. This in turn will increase farm incomes so that the remaining rural population would be able to effectively demand more non-agricultural goods and services — the same stuff that is being produced by the labor released by the farms.

This is along the lines of Irma Adelman recommended long ago: Agricultural Demand Led Industrialization, or ADLI.

The important point to note is that the schemes that Mukeshbhai is concentrating on has, prima facie, nothing to do with development, leave alone development of rural India. But in effect that is precisely what will happen. The answer to India’s rural economic development lies in cities. It is the urbanization of the rural population which will help rural development, not the so-called “development of villages” as I have argued for a while.

To a large extent, the 1,600 farm-supply hubs are approximations of RISC. RISC are the seeds of a mini-city in the rural area. With about 5,000 of these, you can effectively aggregate the 600,000 villages into productive mini-cities.

The approach that Reliance is taking is commendable because it is private sector driven and does not involve the government directly. Indirectly, of course, the government has to acquiese to the plan. Not just that, it is possible that the government will give away quite a bit of the land needed for these new Reliance cities at below-market prices. Yes, Reliance has power and it will only grow. But the question we need to ask is this: is it better that the land gets utilized and wealth created, and even though some of that immense wealth will go to enhance the Ambani fortunes, than the alternative where the land sits around doing precisely nothing and millions of people don’t get to lead a better life? I think the answer is a no-brainer (unless of course the answer is from a no-brainer communist), “Yes, better that someone creates wealth and takes a chunk of it if it means that lots of people will also grow rich, than the alternative.”

[This blog has a lot of posts on cities and urbanization. You can see the whole category on "Cities and Urbanization", or you can see the following selected posts:

2. India Needs Cities.]