China may not be destined to replace the U.S. as the world’s biggest and most dynamic economy (at least not as quickly as some economists have predicted) according to one (my) interpretation of a recently released report by the McKinsey Global Institute.
That is if the U.S. doesn’t lose one of its important competitive advantages vis-a’-vis China (and other countries for that matter).
Dynamic, dominate urban areas will be key to economic growth in what has been coined the century of the city.
According to McKinsey, large U.S. cities (150,000 or more inhabitants) play a bigger role in the U.S. economy (85 percent) than large cities in other major countries and regions, including China (78 percent), Latin America (76 percent) and Europe (68 percent). And the U.S. has more large cities, 259, than any other region or country.
Between now and 2025, those 259 will contribute more to global economic growth than the 355 largest cities of other developed countries combined. In addition, 70 of the 600 cities that McKinsey expects to generate 60 percent of global are American.
That said McKinsey doesn’t address what may hold back the most dynamic U.S. cities from reaching their full potential; inadequate infrastructure investment, poor K-12 education, and immigration restrictions.
While China has been spending trillions of dollars on new infrastructure including high speed trains, ports, roads, and bridges the share of U.S. spending has fallen from 3.1 percent of G.D.P in 1959 to 2.4 percent in 2010 even as the country’s needs have grown.
Congested roads, antiquated air traffic systems and clogged ports are just a few of the manifestations of an infrastructure deficit that is undermining large cities’ economic efficiency. The American Society of Civil Engineers calculates that deteriorating roads alone will cost U.S. cities $240 billion over the next ten years in lost economic growth.
The shortcomings of K-12 education have been well chronicled by the press, studied ad nauseam by academics, and used by politicians to advance their careers. While very few reform ideas have not been at least attempted (The Bush Administration’s No Child Left Behind being a prime example), very little progress has been made. Among peers from 34 countries, fifteen-year-olds in the U.S. ranked 25th in math, 14th in reading, and 17th in science.
As the U.S. falls increasing behind its main competitors in K-12 science and math, policymakers must make high-skill immigration a priority. A growing body of evidence shows that skilled immigrants fuel technological innovation and job growth.
A study by the National Foundation for American Policy found that immigrants were on the founding leadership teams of 24 of the top 50 privately held venture capital-backed companies. The American Enterprise Institute and Partnership for a New American Economy echoed those findings in a similar study of Silicon Valley start-ups and recommended that the U.S. give visa priority to foreign-born workers who earned advanced degrees in engineering, science and math graduates from U.S. universities and increase the number of green cards for highly educated workers.
If the U.S. can get its act together and take serious steps to address these problems which cities are likely to succeed in an increasingly globally connected economy?
The nation’s largest megacities of New York and Los Angeles will continue to prosper, according to McKinsey. New York is on course to remain the second largest city by GDP in the world (after Tokyo) in 2025, and Los Angeles to rise from sixth place today to the fourth-largest city.
A broad base of what McKinsey calls middleweights with their relatively high per capita GDPs or fast growing populations will also continue to play outsized rolls in the U.S. economy.
They include rapidly growing “gazelles” such as Austin and Raleigh, which have outperformed the U.S. average in both per capita GDP and population growth by building on their high-tech presence and strong collaboration with local universities.
Others such as Dallas, Atlanta, Phoenix and Salt Lake City – which McKinsey calls “affordable metros” – have outperform their counterparts because their populations have expanded so rapidly.
Yet another set of cities such as Boston, San Francisco, Seattle and Washington, D.C. – “alpha middleweights”—outperform others with significantly above-average per capita GDP and sustain growth by leveraging the strength of their existing economic base.
Both Beijing and Shanghai are expected to overtake Chicago, the third-largest U.S. city, in GDP over the next 15 years, and other large developing world urban areas including Sao Paulo, Mexico City and Mumbai will climb the GDP ranks as well.
U.S. cities that can take advantage of the urbanization in emerging economies are likely to flourish economically.
The rising power of emerging cities in Asia and Latin America is expected to favor Southern and Western cities. Companies from technology to infrastructure suppliers to consumer goods suppliers are increasingly looking to emerging economies not just for lower production costs but as alternative to slower-growing U.S. consumer markets.
U.S. cities that have good connections or build good connection to global growth hubs – whether business connections, personal connections (e.g., cities with universities that attract foreign students), or physical connections such as airport hubs and ports, will be in a better position to take advantage of rapid growth in the emerging economies including China, Brazil and India.