THE ECONOMY OF CITIES

Introduction

The world has reached a turning point in 2008, where more than half its population, 3.3 billion people, lives in urban
areas. By 2030, the towns and cities of the developing world will make up 81 per cent of urban humanity. The importance of
cities in driving economic growth has never been greater. Cities are the driving force for economic development. Economic
growth stimulates urbanization and represents the best hope for growth and opportunities. Cities are the engines of national
economic development. Therefore to understand the economy of the cities and how it works is crucial in order to plan for the
cities.
Cities differ in terms of their economic base, social and demographic characteristics and the roles they play within the
city system. The variety of local resources on which growth was based during the early development influences the urban pattern
and the competitive advantage of the cities within the framework of the market economy. Cities play an important role as the
driving force in the overall economic development of a country. In the UN-Habitat publication, “The Economic Role of Cities, The
Global Urban Economic Dialogue Series”, published in Nairobi in 2011 (UN-HABITAT, 2011)1, the advantages of cities were
described as;

“Cities provide large efficiency benefits, which result in unprecedented gains in

productivity and competitiveness. Cities are the centres of knowledge, innovation and
specialization of production and services. Cities facilitate creative thinking and
innovation. High concentration of people in cities generates more opportunities for
interaction and communication, promotes creative thinking, creates knowledge
spillovers and develops new ideas and technologies. Cities provide more
opportunities for learning and sharing. Cities facilitate trade and commerce by
providing super market places. Cities serve as production and service centres
because the production of many goods and services is more efficient in a high-density
urban environment. Cities provide consumers with more choices of goods and
services. Cities are the agents of social, cultural, economic, technological and political
changes and advancement.”

The economy of a city refers to the activities that support the growth of
the city. These activities are responsible for attracting businesses, investors, and
population in the city, and generating growth. It is important for cities maintain a
strong economy in order to sustain growth. The success and failure of cities Table 1: Light-based Regional Product (LRP) of
Economic Regions
depend on the economy of the city. Success is usually associated with the

1 UN-HABITAT, 2011. The Economic Role of Cities, The Global Urban Economic Dialogue Series, published in Nairobi in 2011 by UN-HABITAT, United Nations
Human Settlements Programme 2011

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availability of jobs, vibrant business start-up and growing population (Paul
Swinney & Dmitry Sivaev, 2013)2. High population growth is a good
indicator of a strong local economy, but if the economy declines, a city
often will experience a loss in population. It is common for a city to rely on
one production or trade sector for its growth. As long as the sector is
booming, it can be a source of economic and job growth. However, there
can be a disadvantage to this reliance as economies often follow cycles
and thus are vulnerable to growth and decline. The long term prosperity of
cities depends on their capacity to take advantage of opportunities for
sustained economic growth. As the Table 1 shows, strong growing cities or
city region can contribute significantly to the growth of the nation.
In the US many older manufacturing and transportation centers
saw a decline especially in the northeast and Great Lakes areas. On the
other hand, the Sun Belt has become much more prominent. Most of the
economic growth is due to expanding populations and that expansion
Table 2: Major cities in the United States
pushes economic growth. However, there’s no single path to successful
economic growth for cities. Some with diversified local economies did very well, but others were below average; similarly, some
cities that were largely dependent on just one or two economic sectors have suffered, but others did quite well.

The Economy of Cities

The economy of cities varies. For cities to grow, they must have the economies that support it. The growth, decline or
stagnation of the city depended upon the economic activities, which supports beyond the local needs. Most cities' economies will
consist of three major categories of economic activity, but in differing proportions relative to the wealth of that city. The economy
of cities can be resourced based, manufacturing or industries, trade and services, and service-based or knowledge based
economies.

 Resource-based

Most early cities have resource-based economy. Meaning a city whose development and expansion depended
upon the exploitation of natural resources, such as coal, oil, tin, iron ore etc., with the processing of the resources as the
dominant industry. Resource-based city is also called as "resource-dependent city", "resource city" or "resource-oriented
city", in which the word "resource" refers to non-renewable natural resources (Qi Quansong, 2010)3. In other words the
economy of the city depended on the exploitation of the resources and the city holds a very strong resource-oriented

2 Paul Swinney & Dmitry Sivaev, 2013. Beyond the High Street: Why our city centres really matter. Centre for Cities, Enterprise House, 59 - 65 Upper Ground,
London SE1 9PQ, September 2013
3 Qi Quansong, 2010. Industrial Transformation Model of Resource-based Cities and Cases Study, 201O 2nd Conference on Environmental Science and

Information Application Technology.

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 character; there is only a single industrial structure where the leading industries are
merely extractive industries and primary processing industries, totally focusing on
resource development (Guan and Wang, 2012)4.

Cities that depend on one or two major resources for their rapid economic
growth show more unbalanced development because they lack control over their own
economic development. The economic base is controlled by outside corporations or
Figure 1.Tin mining in Ipoh.
governments that determine the nature and extent of the extracting or processing
http://www.behance.net/gallery/A-Story-
activity and thereby determine the size of the local workforce and the degree of local About-Tin-Mining-in-Ipoh/7189403

prosperity or growth. In some resource-based cities the raw materials are usually shipped elsewhere for processing, thus
excluding them from the ultimate economic benefits derived from the resources. Fluctuations in the economy depend on the
vagaries of the international market for resources, or upon government or corporate decisions, and not on local initiative
(Artibise and Stelter, 2013).5 Resource based cities are almost always unsustainable; because the over-exploitation of
resources, resulted in these cities have become or are becoming resource-exhausted cities which contributed to the sharp
downturn of the economy. Exhausted resources, deteriorated environments and many other problems have restricted the
developments of resource-based cities, which have aroused widespread public concern6. The report by the Accenture and
the Chinese Academy of Sciences (2013) 7 stated that these cities are often characterized by a lack of economic diversity,
poor innovation capabilities, unsustainable economic growth, resource and environmental inefficiency, underdeveloped
progress towards a low-carbon economy, and limited infrastructure and application of information technology. To achieve
ongoing and sustainable economic growth, they need to implement strategies to broaden their economic base, move
towards less resource-intensive activity.

Ryan Lackey (2013)8 argued that there is a huge qualitative difference between an economy built on natural
resource extraction, where the populace is non-dynamic, and an economy built on productive labour by the population,
where increasing capabilities of the society leads to more wealth. He further added that natural resource economies in the
absence of local value creation do not tend to lead to well developed societies. He further added that wealth in a resource-
based economy is distributed much more unequally and more inefficiently. It goes to a small number of people at the top,
and they’re at the top due to tribal, family, or political connections, not due to skill or productivity.

In China alone, there are more than 400 resource-based cities based on mining. Among these cities, 20% are in
the growing stage, 68% has already reached maturity, while 12% have declined. Many cities in Malaysia grew from

4 GUAN Zhongmei, WANG Juan, 2012. Study on the tourism development in transformation of Resourced-based cities – Take Jiaozuo City as an example,
International Proceedings of Economics Development and Research, DOI: 10.7763/IPEDR. 2012. V49. 28
5 Alan F.J. Artibise, G.A. Stelter, 12/16/13, Resource Towns, http://www.thecanadianencyclopedia.com/en/article/resource-towns/
6 Xiaoyan Tao, 2012. Study on Ecological Security of Resource-Based City Based on Ecological Footprint Theory, 24th Chinese Control and Decision

Conference (CCDC) 2012.

7 Peter Lacy, Minjun Shi, Guanghai Li, Michael Ding, Xuyu Chen, 2013. Creating Prosperous and Livable Chinese Cities: The New Resource Economy City Index

Report, Accenture and the Chinese Academy of Sciences.

8 Ryan Lackey, 2013. Why Have The Islamic Countries Failed To Develop Even With Resources Like Oil, While Countries With No Resources Like Switzerland

Have Flourished? http://www.forbes.com/sites/quora/2013/01/08/why-have-the-islamic-countries-failed-to-develop-even-with-resources-like-oil-while-

countries-with-no-resources-like-switzerland-have-flourished/

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 resourced based economy. The most prominent were Kuala Lumpur and Ipoh whose early growths were driven by tin
mining.

 Industry

Cities can also depend on industries as their economy. Cities that depend
on industries for their growth are called Industrial cities. The leading industry plays an
important role in their economic growth. Without the industry, the city will struggle to
grow. The health of the industries will determine whether they will struggle
economically or thrive. The types of industries include primary industries, which deal
with the extraction of raw material; secondary industries; which deal and processing;
tertiary industries, which deal with the provision of services like transportation; and
quaternary industries, which is based on research of science and technology. Figure 2. Image of an industrial city in China

Manufacturing is a form of process industry that involves the

converting of raw materials, components or parts into finished goods.
Manufacturing industries can be a chief wealth producing sectors of an
economy. Manufacturing industries are broadly categorized into
engineering industries, construction industries, electronics industries,
chemical industries, energy industries, textile industries, food and
beverage industries, metalworking industries, plastic industries, transport

and telecommunication industries. Manufacturing industries are able to
employ a huge share of the labour force, thus propel the growth of the
cities. Cities which depended on manufacturing generally have a high
proportion of factories relative to a standard city.
Figure3. Donetsk is one of the largest industrial cities in Ukraine.
Source: http://www.123rf.com/photo_10839197_donetsk-ukraine--
october-11-cityscape--aerial-view-donetsk-is-one-of-the-largest-
industrial-cities-i.html

Manufacturing activities are one of the main reasons that led to massive urbanization in many parts of the world.
Manufacturing based cities are characterized by good infrastructure to support the industries, with facilities including
highways, airports, ports and harbours, and research facilities. There are many cities in the world that grew because of their
industries. Detroit, in USA, is an example of a city that grew based on manufacturing and became to be considered to be
the biggest manufacturing city in the world. Detroit is famous for its automobile industry, and is often called the Motor City.

Overdependence on industries as the main economy, however, can result in cities to face decline when the
industry decline. As McIntyre (2010)9 stated, “A city does not die when its last resident moves away. Death happens when
municipalities lose the industries and vital populations that made them important cities.” As industries evolved, the growth of

9 Douglas A. McIntyre, America's 10 Dying Cities: From Detroit to New Orleans, August 25, 2010. http://finance.yahoo.com/news/pf_article_110479.html

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 many cities that depended on the industry that failed to effectively compete in the global marketplace collapsed. As an
example, most of America's 10 Dead Cities such as Cleveland, Detroit, and Buffalo were once major manufacturing hubs.

The answer to this is to diversify the industry. Hackbart and Anderson (1975)10 argued that if a region is too
specialized, it is often subject to a boom-or-bust syndrome; but as it becomes more industrially diversified, the economy of
the region becomes less responsive to economic fluctuations. Smith and Weber (1984) 11 concluded that diversification,
however, must be toward industries with different cyclical patterns than existing industries, if they were to act as a buffer for
instability. However, Smith and Gibson, (1988)12 cautioned that indiscriminate diversification will not necessarily bring
economic stability.

Some cities in Malaysia started as industrial centres. The most prominent were Petaling Jaya and Shah Alam in
Selangor whose growths were driven by manufacturing industries and Bayan Lepas in Penang whose growth was driven by
the electronic industries.

 Trade and Services

Many cities have their beginning as trade and services centres, either by
providing services in expediting the movement of goods, or as a trading post
where the trading of goods took place. Almost every city of importance of the world
once started its history as a trading post or as break-of bulk points such as Venice,
New York, Shanghai, Singapore, Hong Kong, Naples, and Rotterdam. A break-of-
bulk point is a place where goods are transferred from one form of transport to
another, for example the docks where goods transfer from ship to truck. These Figure3. Port of Jacksonville

break-of-bulk points generated city growth as it grew in importance with the increasing volume of goods passing through it.
These cities are sometimes called transport cities. Harris and Ullman (1945)13 emphasized the foundation of the city as a
generic transport focus, emerging from the demand of “break of bulk” and related services and amenities. Mere focus on
transport routes, however, does not produce cities, but if “break of bulk” occurs, the focus becomes a good place to process
goods. Ports originating from mere to transship cargo tend to develop auxiliary services such as repackaging, storing and
sorting. High interregional trades that passed through these cities turned them into important nodes within a large network of
commodity and money flows. As the city grew it attracted other activities such as manufacturing, high technology and
knowledge intensive activities, leisure and tourism.

10 Hackbart, M. M., and D. A. Anderson. "On MeasuringEconomic Diversification." LandEcon. 51(1975):374-78

11 Smith, G. W., and B. A. Weber. "Growth, Diversification,and Cyclical Instability in the Oregon Economy, 1960-1979." Agr. Exp. Sta. Bull. No. 712, Oregon
StateUniversity, May 1984.
12Stephen M. Smith and Cosette M. Gibson, 1988. Industrial Diversification in Non-metropolitan Counties and Its Effect on Economic Stability Western Journal of

Agricultural Economics, 13(2): 193-201Copyright 1988 Western Agricultural Economics Association.

13 Harris, C. D., & Ullman, E. L., 1945. The Nature of Cities. Annals of the American Academy of Political and Social Science, 242, 7-17.

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 Knowledge Base Economy

In recent decades, some cities with a strong history of manufacturing have been able to make the switch to a
strong knowledge economy, and thus have maintained a relative level of economic prosperity in the current economic
climate. The knowledge base economy has been defined as an economy based on creating, evaluating, and trading
knowledge. Knowledge is now recognised as the driver of productivity and economic growth, leading to a new focus on the
role of information, technology and learning in economic performance. The term “knowledge-based economy” results from a
fuller recognition of the role of knowledge and technology in economic growth (OECD, 1996).14 Examples of knowledge
economy activities include research, technical support and consulting.

Knowledge based cities are highly service oriented and the economy is dominated by mature and high value
industries. They are globally connected in terms of finance and insurance and have a high proportion of multinational banks
and financial institutions. Employment in the knowledge-based economy is characterised by increasing demand for higher-
skilled workers. Changes in technology, and particularly the advent of information technologies, are making educated and
skilled labour more valuable, and unskilled labour. The move towards knowledge-based economy will provide the platform
to sustain a rapid rate of economic growth and enhance international competitiveness of cities. While traditional factors of
production, that is labour, capital, raw materials and entrepreneurship, remain important, knowledge will be the key factor
driving growth, creating new value and providing the basis to remain competitive. While information technology (IT) will be
the fundamental enabling tool, the nucleus of the knowledge-based economy will be human capital - essentially the capacity
to create, innovate, generate and exploit new ideas as well as apply technology and exercise superior entrepreneurial skills.

The Third Malaysia Outline Perspective Plan (Malaysia, 2001)15 stated that the characteristics of a knowledge-
based economy as:

 Have abundant resources: Unlike most resources that deplete when used, the knowledge input is ever expanding in
tandem with technology and innovation.
 No location barrier: Innovation in technology opens access to resources and markets all over the world, creating virtual
market places and organizations. There will be increased mobility of workers and capital.
 A highly educated labour force: The knowledge economy comprises a better-informed populace as the government
invests more on human development. Workers contribute to ideas, skills and knowledge by using latest technology.
 A high level of per capita wealth: Knowledge-based investments generate increasing returns to scale and therefore,
more wealth for all.
 Open cosmopolitan society attractive to global talent: There will be ample opportunities for locals to tap foreign
knowledge and learn about best business practices as world-class infrastructure will encourage foreign investment.

14 OECD, 1996. The Knowledge-Based Economy, Organisation For Economic Co-Operation And Development, Paris 1996.
15 Malaysia, Government Of, 2001. The Third Outline Perspective Plan 2001 – 2010.

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 The population will be willing to accept and put into practice new ideas and technologies and hence, local companies
will become fit and fully equipped to face global challenges.
 Well connected to other global knowledge nodes: Connectivity to the rest of the world and technology sharing as well
as technology transformation will be made easy with the free flow of information with lower cost, and reliable
infrastructure encourage information and technology sharing.
 A shift from top-down hierarchical organizational structures to flatter shared-structures: such as networks of semi-
autonomous teams. IT development and communications technology will lead to better interaction among workers and
there will be active involvement of workers in contributing ideas and decision-making.
 Skills and knowledge are key assets: Skills and knowledge become the main assets in the economy to gain
competitiveness.
 Information and communications technologies (ICTs) are the pillars of the knowledge-based economy: Access to
networking is essential in acquiring and disseminating knowledge and the Internet is a key driver of ICT, especially in
the development of E-based activities, resulting in new approaches to doing things.

Sydney is an example of a leading knowledge-based economy in Australia. The City of Sydney economy is highly
service oriented comprising almost 91 percent of the economic output. The professional, technical and scientific services
contribute to around 13 per cent of economic output – this includes the provision of business advisory, accounting, legal,
scientific and engineering related services. The tertiary education sector currently has approximately 35,000 international
students enrolled at city-based tertiary institutions.

Conclusion

All cities must have an economic base in order for them to grow. The economic base of cities may differ from one to
another. The economies of cities however, should be dynamic and evolved in order for them to experience continuous growth.
Modern cities are not base on a single economic base, instead the economy are more diversified leaning more towards
knowledge-based economy.