A new report from Credit Suisse has been getting a fair bit of buzz in the business press, largely thanks to the graph below. The report focused on how urbanization affects developing economies. As an example of the differences between rural and urban productivity, researchers broke down government data on American GDP by state and by hour. Then they looked at how urbanized the states are. And they found that, by and large, the more urban the state, the more more productive it was on average. (The glaring exceptions to this rule being ultra-resource-rich Alaska and Wyoming.) Just click the graph below for a larger, better-defined version.
For our purposes, the graph captures the urban/rural divide across New England reasonably well. With less than 40 percent urbanization, Vermont is among the most rural states in the country–and doesn’t appear to be terribly productive. Maine’s also lightly urbanized–and on the lower-end of the production scale. New Hampshire, meanwhile, hovers around the middle of the pack. Under the Credit Suisse thesis, that makes a lot of sense. Cities like Manchester, Nashua, Portsmouth and Concord would tend to add some umph to the state’s productivity average.
As you move south, though, the story changes. Massachusetts, which is more than 90 percent urban, is among the nation’s productivity leaders. Rhode Island is a little more urban than Massachusetts, and is slightly less productive. And Connecticut, at around 80 percent city-dwellers, actually does better than Massachusetts.
As is often the case with data, however, not everything fits into a neat little narrative box. After all, Pennsylvania’s much less rural than New Hampshire, and on average, it contributes about the same to the national GDP. North Carolina, Louisiana, Oregon and Nevada are also about on a level, in terms of productivity, and they run the gamut from 60 to 90 percent urbanized.
Individual exceptions aside, however, these numbers do appear to tell a compelling story. But what’s so special about cities? Here’s how the Credit Suisse report explains it:
“Typically a 10 percentage point increase in a country’s rate of urbanization translates into a 10% greater tertiary education enrollment ratio. Growth in human capital delivered via investment in intangible infrastructure (education and research and development) is as critical to a city’s ultimate success as investment in physical infrastructure.”
In other words, the percentage of people who go on to post-secondary education roughly coincides with the growth in urbanization.
“As a direct consequence, higher urbanization rates are equally associated with greater investment in technology, research and development and thus a shift up in the value chain of economies enabling a higher delivery of per capita patents and trademarks.”
And more educated people concentrated in one place means a greater demand for technology, which results in more innovation, which results in more patents and trademarks, which in turn generate bigger bucks–and more GDP. Finally:
“Efficiencies of high density populations employed in higher value industries collectively generates higher productivity in urban areas, as illustrated by USA state level data showing the pattern of economic output per hour worked versus the rate of urbanization. It appears that Americans, who live in heavily urbanized states are up to 50% more productive than those who live in more bucolic states. Furthermore, significant cost savings are realized on transportation by concentrating manufacturers and service providers together with their end customers.”
So having more people crammed closer together makes the workforce more productive thanks to the greater proliferation of technology and the high-dollar jobs that come with it. And productivity is ratcheted-up further when you consider the efficiencies built into city life. Everyone’s close together, anyway, so a Boston-based delivery truck can potentially drop off a lot more orders inside the city in one day than the driver responsible for all of Coos County.
If you’d like to see another breakdown of productivity by state, check out this slideshow on MainStreet.com, which uses some of the same government data as the Credit Suisse report.