Look to Cities, Not Countries for Global Economic Impact

If you’ve ever visited friends in New York City, you’ve probably wondered why so many people are willing to put up with such lousy living conditions for so much money.

New York is not alone. International travelers have said the same about London and Hong Kong. Even Eastern European visitors to the capital of the United Kingdom are often appalled by the living conditions they’ve had to put up with in London compared with the creature comforts available to them in global hot spots such as Belgrade, Serbia, or Bucharest, Romania.

Still, whether it’s economists such as Paul Romer or public intellectuals like Richard Florida, experts agree that the concentration of land, labor and capital found in large cities plays a key role in shaping economic growth. Cities and their surrounding metropolitan regions are the economic engines of the global economy. They bring together talented, ambitious people and help stimulate the innovation and enterprise that spur long-term economic growth and prosperity. Globally, cities with over one million people account for more than half of the world’s economic output and nine out of every ten innovations.

And as Richard Florida has shown, even in a large, spread-out country such as the United States, cities account for nearly 90% of total economic output and generate 85% of U.S. jobs. That’s why you can’t throw a rock in Silicon Valley without hitting a delegation of foreign visitors trying to discover the secrets that produced an endless stream of high-tech successes including Google, Apple, eBay and HP.

To measure the impact of the world’s leading cities, Florida developed The Global Economic Power Index, based on five core metrics.

Overall Economic Clout: Evaluates overall economic activity based on gross domestic product (GDP) as measured by the Brookings Institution in its Global Metro Monitor Map.

Financial Power: Gauges global financial power based on think tank and consultancy Z/Yen’s Global Financial Centres Index, which gauges the strength of a city’s finance and banking industries.

Global Competitiveness: Uses two measures. The Global City Competitiveness Index [PDF], by The Economist, includes 32 indicators of economic strength, physical capital, financial maturity, institutional character, human capital, global appeal, social and cultural character and environment and natural hazards. The Global Cities Index from consulting firm A.T. Kearney tracks business activity, human capital, information exchange, cultural experience and political engagement in metro areas.

Equity and Quality of Life: Includes a measure of equity and quality of life in different cities based on The United Nations’ City Prosperity Index [PDF], which measures prosperity along five dimensions: productivity, infrastructure, quality of life, equity and social inclusion and environmental sustainability.

Florida calculates a city’s total score across these five indices, with 10 points awarded to a first place ranking, nine to a second place ranking and so on.

With that, here are, according to The Global Economic Power Index, 2015’s 10 most economically powerful cities. It also compares the updated 2015 rankings to their previous 2012 rank, which itself highlights some important changes.

Many of the names in the Top Ten are predictable enough. New York comes out on top with $1.4 trillion in economic output. New York is also part of the Boston-Washington mega region which sports a $3.75 trillion economy. That makes this urban area the world’s the fourth-largest economy, larger than Germany and a trillion dollars larger than the $2.55 trillion economy of the entire United Kingdom.

Individually, New York and Tokyo would rank among the world’s top 15 economies. Tokyo’s economy is about the size of India’s, while New York is only slightly smaller than Canada. London’s economy is $836 billion — making it the equal of Indonesia, the fourth-most populous country in the world, with a population of 250 million.

That said, some of the results of the survey left me scratching my head.

1) Only two of the top 10 cities are in the United States. Besides New York, only Los Angeles — the second-largest city in the United States and the home of Hollywood — crept into the Top Ten. In earlier versions of the survey, Boston, Chicago and Washington, D.C., were in the top 10. Today, all are absent.

2) There isn’t a single German city on the list, not even Frankfurt, the financial and industrial heart of the world’s fourth-largest economy. You’d figure that 80 million Germans exporting as much as 1.3 billion people do from China, all the while still bailing out their ne’er do well Southern European neighbors, would merit some sign of recognition. Germany, however, does dominate other city lists which measure the quality of life.

3) For all its economic clout, China is conspicuously absent from the list. Hong Kong is technically part of China, but Shanghai — which aspires to be the premier global financial center by 2020 — is nowhere to be found. Ditto for China’s capital, Beijing.

For all of its arbitrariness, Florida’s list does remind you that as far as global economic impact is concerned, you’re better off thinking about cities than countries. According to the McKinsey Global Institute (MGI), half of global GDP in 2007 came from 380 cities in developed regions, with more than 20 percent of global GDP coming from 190 North American cities alone. As Florida puts it, the world remains extremely “spiky,” with its economy dominated by a relatively small number of powerful cities and metro areas.

In addition, 2011 marked the first time in human history that more people lived in cities than in the countryside. And from all appearances, that trend is only going to accelerate.

I encourage you to read my e-letter column from last week on whether it’s a good time to invest in emerging markets. I also invite you to comment in the space provided below.