Megacities and Urban Agglomerations as Drivers of GDP Growth

Economic growth is possible if, and only if, there is a competitive environment that allows businesses to develop. Creating such an environment is the state's main task. There are various ways to build a healthy competitive environment: establishing equal legal opportunities, regulating monopolies, digitalizing public services, creating non-discriminatory rules that give all market participants access to state benefits and services, and so on. But another significant factor in a healthy competitive environment is the creation of the right agglomerations and megacities. There are many examples around the world, but it is huge cities and agglomerations that create an environment for high labor productivity, because:

Population density greatly reduces transaction costs, while the scale of sales and production allows producers to cut unit costs by spreading fixed costs over more units of output.

High population density provides access to labor of varying skill levels, and a competitive labor market leads to the selection of the most productive workers.

An environment of successful people motivates people to grow and improve their skills and competencies. Being in a community (at work, in the neighborhood, at our children's school and so on), we see how others develop and strive to keep up with them.

Big cities offer better education, which produces more productive generations overall. The best universities and schools are located in big cities.

Big cities make it possible to build large medical centers and provide better healthcare, so people living in cities are more productive both during their working lives and because they live longer and therefore work more.

There is plenty more evidence of why big cities generate more GDP. That is why the state should give priority to developing megacities and agglomerations.

The most important issues in the story of cities are infrastructure and housing construction. When the state builds housing itself, in order to address the needs of socially vulnerable groups and to support GDP growth through construction, I can say with some confidence that this is a poor idea. The state builds housing very badly, and the result is an unfavorable environment that gives people no motivation. Such buildings are then poorly maintained, so the districts that emerge are far from the best ones, and the housing simply loses value. Trying to drive GDP growth through housing construction is also a poor idea, because housing is a final consumption product with no multiplier effect: every tenge invested will yield no more than 70% in GDP, with the rest going to imports.

That is why it is important to promote comprehensive neighborhood-scale development by private companies, which allows cities to develop properly, creating the right environment and their own polycentric structure. In this respect, I like how Dubai is being built. There is no piecemeal development there; instead, entire neighborhood projects are created, where housing is built together with shopping centers, business centers, hotels, schools, hospitals and so on. In such a model, the state should provide utility and transport infrastructure and build schools and hospitals. Within the framework of state procurement, it is also better to agree with the developer from the outset on buying out part of the housing for those on waiting lists, who will then live in decent conditions and in the right environment. This approach not only allows agglomerations and megacities to develop properly, but also significantly reduces housing costs for people.

In Kazakhstan, the outlines of three megacities are already visible: Almaty, Astana and Shymkent. I believe we need a single agglomeration development document, and in my view Aktobe, Karaganda and Oskemen could be added to the list at a minimum. Neighborhood-scale development makes it possible to create polycentric cities and space for small businesses. In the end, all of this leads to growth in the GDP of the city and the agglomeration, which ultimately drives growth in national GDP. This approach delivers far more value than mortgage programs, or building entire districts of social housing where there is no opportunity to create value.

Economic growth is possible if, and only if, there is a competitive environment that allows businesses to develop. Creating such an environment is the state's main task. It can be achieved in different ways: creating equal legal conditions, regulating monopolies, introducing digital public services, and ensuring non-discriminatory access to state benefits and services for all market participants, and so on.

But one of the key, and often underestimated, factors in building a healthy competitive environment is the creation of the right agglomerations and megacities. There are many examples around the world, but we see the same thing everywhere: big cities are what catalyze growth in labor productivity. Why does this happen?

Population density radically reduces transaction costs, while the scale of sales and production allows producers to lower unit costs by spreading fixed costs over more units of output.

A high concentration of people provides access to labor of different levels and qualifications. Competition in the labor market makes it possible to select the most effective employees.

The social environment motivates. Living and working among active, successful and growing people, we unconsciously strive to measure up, and this applies not only to the professional sphere but also to our general level of development, culture, education and ambition.

The quality of education is higher in big cities. The best schools and universities are located there. This shapes more productive generations.

Healthcare is another factor. Large cities make it possible to build multidisciplinary, high-tech medical centers. The result is better health, a higher quality of life and a longer working life.

There are many more arguments showing that megacities and agglomerations are the locomotives of GDP growth. That is precisely why the state should focus on developing cities and agglomeration zones.

But if we are talking about the development of cities, the foundation is infrastructure and housing. And this is where systemic mistakes often begin.

When the state takes on the role of developer in order to "accelerate" GDP through construction and to address social goals, the outcome is, as a rule, the opposite of what was intended. Housing of questionable quality gets built, and the environment it creates does not motivate people but holds them back. Such districts are then poorly maintained, they have no growth points and no social dynamism, the housing loses value and the quality of life declines. And there is almost no multiplier effect: housing construction, as a final consumption product, does not deliver a significant GDP effect. Every 100 tenge invested yields an economic return of no more than 70, with the rest going to imports.

A completely different approach is needed. The state should not build; it should create conditions for comprehensive neighborhood-scale development by the private sector. Such projects create a full-fledged urban environment with polycentric structures in which businesses, infrastructure, and social and educational facilities emerge.

I like how this is done in Dubai. There is no piecemeal development there. Neighborhoods are created all at once: housing, business centers, shopping centers, schools, hospitals, hotels, parks and transport. Everything is part of one whole, and everything is connected. This creates a high-quality urban environment.

In this model, the state should play a different role:

• build trunk utility infrastructure;
• provide schools and hospitals;
• agree with developers in advance on buying out part of the housing for those on waiting lists, so that they are fully integrated into a normal urban environment rather than placed in "social ghettos."

This approach means developing agglomerations, creating value, and lowering housing prices through the state's infrastructure investment.

In Kazakhstan, three megacities are already taking shape: Almaty, Astana and Shymkent. But I believe that, in the strategic perspective, we should be talking about at least three more: Aktobe, Karaganda and Ust-Kamenogorsk. To make this a reality, we need a single agglomeration development document, with a vision, master plans and priorities.

Neighborhood-scale development is not just about buildings. It means forming polycentric cities, creating space for small businesses and generating new jobs. All of this leads to growth in the GDP of the city and, in aggregate, of the whole country. And this approach delivers many times more value than mortgage programs or piecemeal districts of social housing, where it is impossible to create long-term value.