Urbanization Is Transforming the World — Again | American Funds

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Investment Insights: The Long View

August 2015

Urbanization Is Transforming the World — Again

“The growth in the developing world is having a profound effect on the global economy, and it also has significant implications for companies in the U.S. and other parts of the developed world.”

— Jody Jonsson

Jody Jonsson
Joanna F. Jonsson Portfolio Manager Los Angeles office 28 years of experience (as of 12/31/16)
The wealth of nations soars when societies shift from rural to urban

Per Capita GDP Has Risen in Tandem With Increases in the Urbanization Rate

Source: Exhibit from Urban World: Cities and the Rise of the Consuming Class, June 2012, McKinsey Global Institute, www.mckinsey.com/mgi, © McKinsey & Company. All rights reserved. Reprinted by permission. Urbanization is the increasing number of people living in cities as populations shift from rural to urban areas; the definition of urbanization varies by country. Pre-1950 data for the United Kingdom are estimated. Historical per capita GDP is expressed in 1990 Geary-Khamis dollars, which reflect purchasing power parity (PPP) that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency’s purchasing power. PPP helps determine the exchange rate adjustment so that identical goods and/or services in different countries have the same price when expressed in the same currency.

Urbanization isn’t a modern phenomenon. In centuries gone by, the shift to living in cities underpinned the industrial revolutions of Europe and the United States and the rise of those regions to global economic and political power. Now urbanization is transforming the developing world. But what is different about today’s wave of mass urbanization is its unprecedented speed and scale, according to the McKinsey’s Urban WorldCities and the Rise of the Consuming Class.

Cities are economic dynamos. They attract skilled workers and productive businesses. Cities offer higher wages and better standards of living than those available in rural areas. As countries develop, urbanization and growth of per capita GDP tend to be correlated. The key reason for this relationship between cities and growing wealth is that the increased density of urban populations produces economies of scale that boost productivity, which in turn enhances growth — a virtuous cycle.

Around the world, the number of cities with a population greater than
10 million is expected to rise from 18 in 2007 to 41 in 2025, with Lagos and Jakarta joining the list of megacities. Just as the process reshaped the world in the past, urbanization is likely to redefine much of the world this century. Indeed, the world’s cities will add 65 million inhabitants a year between 2015 and 2025, creating opportunities for social and economic development, and exerting pressure on infrastructure and resources.

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