By Drew Erdmann

The 2012 London Olympic Games will begin later this month. While the world will focus on sport, this Olympic Games also reminds us that the cities of the world are in constant competition as well. The history of 2012 London Olympic Games will be as much a story of the City of London’s effort to remain a leading, globalized city in the 21st Century as about the Gold Medal winners. We see this in the aspirations for the redevelopment of London’s East End to the “re-branding” of London as a global hub for commerce and services to innovations in reusable and environmentally friendly venue design. London’s success is by no means inevitable. The Economist recently described London as both “the world’s most international city” and “a precarious brilliance.” Other rising cities are challenging London and Western cities for economic, cultural, and political influence. Symbolically, the London Games follow the 2008 Beijing Games and precede the 2016 Rio de Janeiro Games. Although costly, the Beijing Games introduced the new Asian superpower to many in the world, and the Rio Games will undoubtedly help mark Brazil’s rise on the global stage as well.

The competition among such cities will continue in the decades ahead. The overall “megatrend” of increasing urbanization is clear, i.e., the world is becoming more urbanized literally every day. The implications are less clear. The blog’s objective for this week, therefore, is to explore the urbanization trends that will help define humanity’s history in the next twenty years and their implications for economics, governance, and security. Cities like London, Beijing, and Rio will be important characters in this history. Perhaps even more important, however, will be the host of new urban centers that are rising rapidly throughout the developing world.

This week’s blog hopes to provoke discussion and raise questions as much as provide answers. And the blog will feature diverse contributors to help stimulate this discussion. Picking up on Steven Weber’s plea to readers from 2 weeks ago, please take advantage of the “leave a reply” link to contribute to the discussion. The more voices and points of view the better!

Here are six observations to help jumpstart this week’s discussion of urbanization.

First, the pace of this era’s urbanization is unprecedented and it is already one of the most important forces reshaping the world. A future historian will likely point to the year 2008 as a historic turning point – not only because of the Beijing Olympics, but also because 2008 marked thefirst year in humanity’s history when a majority of people lived in towns and cities. As Edward Glaeser’s recent The Triumph of the City (2011) underscores, cities are one of mankind’s greatest creations, the centers for innovation, the prime drivers of economic development, and, as such, they will continue to attract hundreds of millions of the world’s poor as they seek a better life. The scale and pace of this change is hard to grasp. Around 1.3 million people will migrate to cities and towns every week for the next two decades, according to United Nations statistics. Most of this movement will continue in emerging markets, but transnational flows will be important as well.

Second, urbanization is driving the rebalancing of global economic power toward emerging markets, especially in Asia. This movement of people is a major driver of the rapid economic growth experienced in countries around Asia as well as parts of Latin America and, increasingly, Sub-Saharan Africa. Just as the developed economies of the West did decades ago, emerging markets are now capturing the huge productivity gains that cities’ concentration, economies of scale, and innovation afford and that. The implications are profound. For the first time in over 200 years, the majority of the world’s economic growth during this decade will occur in emerging markets, not the developed economies of the “West.”

Third, urbanization and the rise of new middle classes are two sides of the same coin.Estimates suggest there will be by 2025 more than 1 billion new consumers with incomes sufficient to purchase consumer goods beyond those needed for subsistence. More than 95% of these new “middle class” consumers will live in emerging market cities. Likewise, the majority of new high-income households – with annual incomes of over $70,000 (in terms of Purchasing Power Parity) – will be found in emerging market cities. This massive increase in urban consumers will drive a corresponding increase in demand for a full range of products and services from home appliances to telecommunications to automobiles to recreation (e.g., dining out, travel). New middle class consumer demand in emerging cities will thus be a major force in the global economy. This demand will, in turn, reshape business strategies, supply chains, talent and capital flows, and potentially regulatory regimes.

Fourth, urbanization will place unprecedented strains on resources and societies. If the pace and scale of the new cities’ growth in population and wealth is staggering, the resources required are no less so. Infrastructure investments will need to soar to keep pace. The McKinsey Global Instituteestimates that new physical capital investments in cities will need to increase over $10 trillion per year by 2025. That is equivalent to more than the combined current economies of Japan and Germany! The demands on natural resources and the environment will also be historic in scale and scope. At the same time, because cities can be relatively efficient, increasing urbanization does afford opportunities for improved resource productivity as well.

Fifth, urbanization will stress governance at all levels – local, national, and international. This is a corollary to the preceding observation. For instance:

  • Local and national governments the world over will struggle to provide basic services to burgeoning urban populations while maintaining some reasonable fiscal boundaries.
  • New middle classes will make demands upon their governments. We will likely see new middle classes in some countries seeking to extend their economic clout to greater political influence. At the same time, there is no inevitable alignment of interests among middle classes across national boundaries (i.e., an “outsourced” American job may be a stepping stone to the middle class for someone in Asia).
  • The flow of peoples from countryside to cities, and between countries, will pose their own challenges for governance at all levels (see, for instance, the recent Global Trends 2030 Blog entries related to migration).
  • The vast resources required to sustain urbanization will not only influence global markets in important commodities, but also place new strains upon governments. Consider, for example, the challenge of water scarcity in China. Given current trends, some basins within China will remain in surplus in the coming 20 years, while others will likely confront significant gaps between supply and demand. How will the Chinese government manage its water resources across its different regions? Many other governments will face analogous resource dilemmas.
  • Increasing urbanization, combined with this era’s global interconnectivity, will challenge how individuals define their own identities. Will people think of themselves first as citizens of a particular city or a country or a transnational Diaspora community? Or, as Chrystia Freeland suggested in The Atlantic last year, will we see the rise of a “new global elite”? Such a cosmopolitan elite could live inside gated communities – whether in Florida or Rio or Johannesburg – and share common education, experiences, and values with others of the same jet set class, but little with “fellow citizens” of their respective countries of origin. This could be an era defined by struggles to reduce inequality.

Sixth, urbanization will challenge our traditional approaches and tools for national security.The 20th century experiences of the Second World War and the Cold War, for example, still heavily influence the United States’ diplomatic footprint, alliance relationships, and intelligence capabilities. The 21st century’s rise of new urban centers in the developing countries and concomitant shift in economic power are already challenging these institutional legacies. Alliance relationships will be redefined and new ones forged. New capabilities will be needed. Diplomats will need to be deployed in new cities and able to engage with new kinds of players. Militaries around the world will need to prepare to operate even more in urban environments.

In sum, how well leaders around the world in the public, private, and nonprofit sectors comprehend this new wave of urbanization, identify its manifold implications, and then adapt institutions, norms, and practices to harness its potential will have a profound impact on the trajectory of international development, peace, and security in the coming 20 years.

Drew Erdmann is Principal in McKinsey & Company’s Washington, DC office. He previously served with the Department of State, the Department of Defense, and the National Security Council staff. The views expressed herein represent his personal views and do not necessarily reflect the perspectives of any organization with which he is affiliated.