Economic growth and high density areas

This blog has been a strong and consistent advocate of urbanization, arguing that it is the most effective strategy to address the issue of economic growth in developing countries. In fact, it is not so much the demographic constructs called cities that are important, but its distinguishing characteristic of large populations residing in high density areas.

NYT has this excellent excerpt, which explains the benefits of large densified population centers using the example of a Vietnamese cuisine restaurant, from Ryan Avent's new e-Book. It is worth reproducing in whole and is a brilliant illustration of the dynamics of large densities - specialization, choice and insurance, productivity increases, competition, cost-effectiveness, quality improvements, innovation etc - and how the larger markets and workforce contribute to economic growth - jobs, consumption, investments, and growth spillovers. It reads,

"Suppose that within a population one person in 100 develops a taste for Vietnamese cuisine, and suppose that a Vietnamese restaurant needs a customer base of 1,000 people to operate profitably. In a city of 10,000 residents, there aren’t enough people to support a Vietnamese restaurant. The only restaurants that can operate profitably are those appealing to considerably more than one in 100 people — restaurants offering less daring fare. In a city of 10,000 people, there is little room for specialization, and less for experimentation.

A city of one million people, by contrast, can support multiple Vietnamese restaurants. Not only will this larger city enjoy a specialty cuisine unavailable in less populous places, but its ability to support multiple producers of this cuisine allows for competition, improving the price and quality.

A city with multiple Vietnamese restaurants may attract sellers of the fresh ingredients used in Vietnamese cooking, who then invest in distribution of those products in the larger city. This, in turn, attracts the sort of discerning eaters who favor authentic, high-quality Vietnamese food, reinforcing the concentration of Vietnamese eateries. The larger market facilitates competition, which again boosts quality and reduces prices. This is good for consumers. But competition also means better service from suppliers and growth in the consumer market, which is good for the restaurants. The result is a stronger, more productive and higher-quality microeconomy than in the city of 100,000, where only one Vietnamese restaurant can survive, or the town of 10,000, where there is none at all.

Density doesn’t work without talent. A small market may only support restaurants producing food that caters to a broad range of tastes. These restaurants will have to hire generalists — cooks who can produce a broad range of cuisines. Specialization and fine-tuning of one’s skills aren’t rewarded; too few patrons will have the specific taste for the particular cuisine to appreciate the quality. Time spent nailing down the nuances of one cuisine is time a chef isn’t using to maintain a good-enough command of a broad range of dishes.

In the larger market, supporting multiple niche cuisines, the calculus is different. Because there may be multiple Vietnamese restaurants competing for patrons, mastery of that specific style is necessary to maintain an edge against the competition. This is particularly true as the concentration of Vietnamese restaurants is likely to attract devotees of the cuisine with a well-developed knowledge of and taste for it. Hence, the larger marketplace pushes for, rather than against, specialization.

Meanwhile, a worker hoping to make a living as a Vietnamese chef will have a much easier time of things in the larger city. Labor turnover may be greater — if there’s only one Vietnamese restaurant in a town, then head-chef spots may only rarely open up — and so the odds of finding employment are higher. The larger city also provides insurance against bad fortune. If you’re a Vietnamese chef working at the one Vietnamese restaurant in a town and the one Vietnamese restaurant goes bankrupt, then you’re obviously in a tough economic situation. You must either take another job for which you’re less qualified, which may mean a reduction in compensation, or move. In the larger city, by contrast, competing restaurants can absorb and reemploy the labor and resources of defunct competitors.

This insurance function is important. It reduces the risks associated with specialization and therefore encourages more of it. By allowing workers to focus on tasks at which they’re relatively better than others, specialization helps drive economic growth. It’s also an engine of innovation. As workers focus on a specific task, they may well find better ways to do it. They might better schedule their days or invent something entirely new — software code written to expedite repeated tasks, or a machine that automates portions of a task. Of course, existing companies can be resistant to innovation. Dense cities, by acting as a source of insurance, enable workers with good ideas to take risks and start new businesses. If these workers fail, they have a good chance of finding employment elsewhere in the city. And if they succeed, the task of staffing the company is made easier by the existing pool of talent, and odds are good that customers and suppliers are close to hand, as well. Big cities provide a climate in which innovation can flourish, and in which innovators have the resources they need to exploit new ideas."

Arguably, the biggest challenge for large developing countries like India is the creation of large numbers of jobs to absorb its massive and expanding labour force. Economic growth is the only way to satisfactorily address this challenge. As economies grow, businesses invest, which in turn creates jobs, which fuels demand, and more investments follow, and the virtuous cycle repeats.

Fragmented and infrastructure deficient rural markets cannot generate these dynamics and therefore cannot be the platforms to replicate growth in the scale required. This virtuous cycle can be replicated on a large enough scale only in densified urban environments. The newly created jobs require a pool of readily available labour and their products demand a large enough consumer base. There is also the need for the entire infrastructure logistics that can support these job creating economic activities.

However, in case of massive countries like India, this densification approach has to be complemented with a strategy that promotes growth of smaller towns and cities, either by themselves or as satellites to larger cities. Infrastructure improvements in these smaller cities will attract immigrants, who in turn form the workforce and the market to sustain an expanded pool of economic activities. Investments and jobs will more often than not follow.