The American general Curtis Le May, one of the promoters of the U.S. Air Force stated once “I’d rather have somebody who is real stupid but did something—even if it’s wrong he did something—than have somebody who’d vacillate and do nothing.”
For more than forty years the world has been witnessing the formidable phenomenon of metropolisation. This occurs when economic and population power are concentrated in a few mega cities at the at the expense of the rest of a country's medium-sized cities.
We are not talking about the problem of ‘empty countries’, but about the problem of medium-sized cities that are being depopulated. This process has generated important social wounds in the form of significant gaps in productivity and therefore in living standards, both in Western and emerging countries, which weighs down national cohesion. Unfortunately, we have not delved into the underlying reasons, and, and as LeMay would say, we have not done anything at all either. It is the worst of all worlds; we neither vacillate nor act.
Let us analyse what is happening first. In later articles we will propose solutions.
First, as a result of the fourth industrial the highest-paid occupations which are usually associated to greater productivity create ‘network’ and ‘call’ effects that lead to the gathering of large populations, which feed back into each other.
Second, when workers move from a medium-sized to a large city, their productivity rapidly increases, as do their wages. Therefore, the ‘call effect’ is exacerbated and creates an ongoing process (see chart below on Spain).
Source: “Learning by Working in Big Cities”. Jorge de la Roca (U. Southern California), Diego Puga (CEMFI), Review of Economic Studies, 2017. |
Third, the college population in medium-sized cities end up migrating to big cities so that they may enjoy the alleged benefits of higher productivity and larger income levels. Thus, there is a wide gap (inequality) between big cities and the rest, both in terms of population and wages (see chart below on the USA).
Fourth, the inflows of this type of workers push up the price of assets (especially real estate) and services, thus displacing less educated population to city outskirts.
Fifth, as automation spreads the labour market reshapes itself so middle level education jobs disappear (manufacturing, administration, sales …).
Sixth, wage dispersion grows in this context, since tech disruption-related labour market demands workers with certain skills. Those who have them are very well paid, but those who do not receive lower salaries. Thus, the problem of geographical inequality is compounded by the problem of income inequality.
Seventh, as medium-sized cities gradually empty out, rural areas face more pressure as they are often highly dependent on thriving cities to which they are providers and from which they receive goods and services.
Eight, R&D investment is concentrated in mega-cities, precisely to take advantage of network effects, closing the feedback loop.
Recently, McKinsey published a report that analysed 178 countries, showing how half of the economic growth since 2000 had been generated in areas that represented less than 1% of the territory, with 27% of the population, and how the productivity of mega-cities doubled that of other areas of the country. Thus, the remaining 99% of the global territory and 73% of the population is left behind. The report even pointed out how 600 million people had seen their per capita income fall in the last two decades (an unprecedented fact), in depressed areas where… surprisingly? the populist vote had soared.
Quoting Nobel laureate Isaac Bashevis, “we must believe in free will — we have no other choice”. Something similar is true of what I believe to be the most dangerous of all inequalities, the geographical one. We have to gain an insight into what is happening in order to believe in it, and only then can we come up with possible solutions.
Ignacio de la Torre
Chief Economist, Arcano Partners
https://arcanopartners.com/en/