prosperous cities: the key to latin america’s_the_key_to_success...1 based on the average exchange...

Prosperous Cities: The

key to Latin America’s

success

Jaana Remes

McKinsey Global Institute

April 28, 2014

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company is strictly prohibited

McKinsey & Company | 1

Latin America’s cities are the key to

its economic future

Yet the region’s largest cities have run into

constraints to their capacity to sustain growth

The challenge now is to bridge rising consumer

expectations with disappointing income growth

Today’s discussion


1950

Germany

2005

Per capita GDP has risen in parallel with urbanization

and industrialization across regions

30,000

10,000

3,000

1,000

300

Per capita GDP

1990 PPP $ (log scale)

Urban population

%

DO NOT DELETE!

0 10 20 30 40 50 60 70 80 90

1820

United States

2005

1860

United Kingdom

2005

1939

1891

Japan

2005

1920

China

2005

1930

Brazil

2005

1950

South Korea

2005

1950

India

2005 1950

Italy

2005


Cities play a key role in Latin American economy –

80 percent of the population already lives in cities and towns

SOURCE: United Nations Population Division Department of Economic and Social Affairs, World population prospects:

The 2009 revision, March 2010; McKinsey Global Institute analysis

North

America

86

82

Europe

77

73

Africa

47

40

India

37

30

China

59

46

Asia2

53

47

Latin

America

84

79

2009

2025

1 Urban population according to national definitions

2 Excluding China and India

Population living in urban areas,1 2009 and 2025, Percent


Latin America has ~280 large cities with a population of 200,000 or more

SOURCE: McKinsey Global Institute Cityscope 2.0

1 GDP as of 2010, measured at current exchange rates

GDP 2010, $ Millions

>200

50-20020-5010-200-10Monterrey

Caracas

Ciudad de

México

(Mexico

City)

Bogotá

LimaBrasília

São Paulo

Rio de Janeiro

Buenos AiresSantiago

Large cities dominate

the region’s economic

landscape today

▪ ~280 large cities are

home to more than 300

million inhabitants

▪ These cities generate

$3.7 trillion in GDP1,

more than 75% of the

region’s total


The 10 top cities alone generate about a

third of the region’s overall GDP,

a higher share than any other region


City name

Pop.

(million)

GDP

(Billion

at RER)

Per capita

GDP (000

at RER)

1 Share of top 10 cities from each one of these regions in world’s GDP.

2 Includes China, Hong Kong, Macau and Taiwan

3 Includes Afghanistan, Bangladesh, India, Pakistan, and Sri Lanka.

Monterrey

4.1 69.4 17.0 Bogotá

8.6 85.0 9.9

Belo Horizonte

5.4 78.5 14.5

Brasilia

3.7 101.6 27.3

Rio de Janeiro

11.8 180.9 15.3

São Paulo

19.7 437.5 22.2

Buenos Aires

13.1 191.7 14.6

Santiago

6.1 93.0 15.2

Lima

9.2 77.3 8.4

Mexico City

20.1 255.1 12.7

GDP 2010, $ RER

>200

50-200

GDP share of the top 10 cities by

region

Percentage

21

21

South Asia3

Africa

Eastern Europe

& Central Asia24

16

China region2 23

Latin America 33

Western Europe 24

U.S. and Canada 29

World1



its economic future







Most Latin America’s top cities have grown more slowly than

their host economies in the recent past

The relative growth of São Paulo and Rio de

Janeiro have declined in the recent past

1920-70 1970-2008

Period

Most of the top ten cities have grown slower

than their host economy

SOURCE: National and local statistical offices; McKinsey Global Institute Cityscope 1.2

57

93

91

39

89

66

100

100

144

113

Period Indexed GDP growth

São Paulo

Brasília

Santiago1

Lima1

Mexico City

Buenos Aires

Rio de Janeiro

Bogotá1

1999–2008

2000–2009

1998–2008

2000–2009

1999–2008

1993–2003

1999–2008

1996–2006

2001–2009

Monterrey

(1) In cases where GDP data were not available at the city level but the city represented most of the region/province, we used data at this next level

GDP growth

Compound annual growth rate, percent

City GDP growth relative to national average

Index: 100% = country GDP growth, percent

4.4

2.6

3.5

6.8

7.0

São Paulo 10.3

Brazil

Rio de

Janeiro


9

23

17

23

19

Total regional GDP growth 90 10

Small cities and rural areas 10

Small middleweights II

0.2 – 0.75 million inhabitants

Small middleweights I

0.75 – 2 million inhabitants

Mid-size middleweights

2-5 million inhabitants

Large middleweights

5-10 million inhabitants

Megacities

> 10 million inhabitants

Almost 60% of regional GDP growth to 2025 will come

from mid-size and small middleweight cities

# of Cities

2010

%

2025

%

Growth Rate

%, CAGR 07-25

Share of GDPContribution to Latin America GDP growth,

2010-2025

% of regional GDP growth at RER

4

4

16

76

189

–

22.2

14.7

6.9

18.5

14.9

22.8

22.6

16.6

8.0

20.6

15.7

16.4

4.7

5.6

5.4

5.3

4.9

2.2

4.5


59%

100 =

USD 4.5 trillion


Growing cities put increasing pressure on city services and infrastructure

1 Containers traffic volume accounts for demand generated in large cities only. TEU stands for “Twenty-foot equivalent unit,” used to describe the

capacity of container ships.

2 Building floor space growth includes floor space replacement.SOURCE: McKinsey Global Institute Cityscope 2.0

24

51 56

7688

76

49 44

2412

100% =

2010 total

Growth, 2010–25

142219140

10.0Compound

annual growth

rate, 2010–25

%

4.5 1.94.0 0.9

Container

volume

Million TEU1

GDP at RER

$ trillion

Building

floor space

Thousand

sq. km.2

Municipal

water demand

Billion cubic

meters

Population

Billion people

Estimated urban market demand in Latin

America, 2025

%


8,501

5705,636

2,124 172

Total

dwelling

demand

2025

10,336

Second

home

demand

289

New

house-

holds

2007–25

2,864

Current

gap

550

Dwelling

stock

2007

6,632

1,7243233,892

132 6,072

1,304 155 3,760

1,931 370

New

house-

holds

2007–25

156

Current

gap

401 1,60733

Second

home

demand

Total

dwelling

demand

2025

Dwelling

stock

2007

1,017

Demographics will drive strong housing demand

across the region to 2025

SOURCE: McKinsey Global Institute–McKinsey Latin America Model; McKinsey Global Institute analysis

Total housing requirements by 2025

Thousand dwellings

+51%

+56%

+56%

+95%

+58%

Mexico City Rio de Janeiro

Bogotá

Monterrey

São Paulo

Compound annual

growth rate,

2007-25 (Percent)


Cities also need to prepare for energy and resources challenges,

as well risks from environmental hazards

SOURCE: MGI Cityscope; BP Statistical Review; Water Resources Group; World Bank; Global Insights; Center for

Hazards and Risk Research (CHRR); Center for International Earth Science Information Network (CIESIN),

Columbia University; McKinsey analysis

Combined risk of disruption from drought, flood, or cyclone in 2025

High

Medium

Low



its economic future







1

17

49

19

9

5

13

34

31

11

6

5

20,034 (B2)

82,852 (A)

36,333 (B1)

5,093 (D)

2,784 (E)

9,338 (C)

Struggling

consumers

“Belly of

the

market”

Global

consumer

0.6

2.1

-3.9

-3.3

12.4

5.3

1 Based on the average exchange rate of 2010 of US$ 1 = R$ 1.767.

SOURCE: Target; Oanda

Progress in poverty reduction is creating a new

consuming class with rising expectations – Brazil example

Average annual

household

income (class)

USD

Urban households

2000

100% = 33.9 million

2010

100% = 47.2 million

Change in number of

households, 2000–10

Million


Yet the region’s growth has been disappointingly low: Mexico has

not raised its productivity in 30 years, despite NAFTA and reforms

SOURCE: Conference Board Total Economy Database 2013; McKinsey Global Institute analysis

201209029570601950 8981

+3.3% p.a.

-0.1% p.a.

Desarrollo

estabilizador

GDP per hour worked

2012 PPP dollars

7

8

9

10

11

12

13

14

15

16

17

18

19

6

Excess

boom

Lost

decade

NAFTA

+0.8% p.a.


The gap between modern and traditional

segments is widening – Mexico example

SOURCE: Censos Económicos 1999, Censos Económicos 2009, Instituto Nacional de Estadística y Geografía; McKinsey

Global Institute analysis

Value added per occupied person

$ thousand, constant 2003 $

25

13

7

44

14

4

≤10 11–500 >500Number of employees

-6.5

+1.0

+5.8

1999

2009

Compound annual

growth rate,

1999–2009 (%)

Share of employment, %

1999

2009 42

39

38

41

20

20


The challenge for Latin American cities is to address ‘pressure points’

so that they don’t lead to tension in the civil society

- Land

- Water

- Energy

Natural

resources

Infrastructure

Economic

opportunities

- Physical

- Social

- Virtual

- Job creation

- Income growth

- Inequality

Large cities can be

the source of

economic prosperity

in their nations…

… and LatAm cities

have proven their

capacity to solve

problems with

innovative solutions


Thank you

These reports and other MGI

research are available at:

www.mckinsey.com/MGI

@McKinsey_MGI

@JaanaRemes

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