A nice piece by Alan Berube of Brookings Institute.
Earlier cities dominated world trade which was taken over by central governments overtime. Now cities are again making a comeback:
More than 2,000 years ago, before the emergence of the nation-state, the Silk Road connected Xi’an, Baghdad, Istanbul, and hundreds of other cities through trade. In the Middle Ages, Zanzibar and other East African cities served as trading hubs for Asian merchants. And the Hanseatic League, a confederation of market towns, facilitated trade between coastal European cities between the thirteenth and seventeenth centuries.
Cities unite people who seek common space to exchange goods, services, and information. In the mid-eighteenth century, Adam Smith observed that in his native Scotland’s sparsely populated Highlands, “every farmer must be butcher, baker, and brewer for his own family.” But cities, he noted, permit the division and specialization of labor, allowing people to trade what they do not consume.
Likewise, in the nineteenth century, the English economist Alfred Marshall described how cities are really “agglomeration economies” that gather the infrastructure, workers, and information needed to promote innovation and trade. And, in 2008, Paul Krugman received the Nobel Prize for his work explaining how, amid increasing capital and labor mobility, metropolitan areas remain crucial nodes for trade.
However, they were not given their due in recent times:
In short, cities make trade possible. But the United States and other advanced economies have traditionally neglected this when designing trade policies, consistently favoring blunt instruments like tax and monetary policy over “bottom-up” approaches that support the distinct comparative advantages of cities and regions in global markets. By contrast, China considers city-building a crucial aspect of its export policy.
Furthermore, local policymakers often forget that trade increases city residents’ prosperity by bringing in new wealth, in turn contributing to job creation and bolstering demand for services in the local economy. In recent decades, too many American cities have relied on vanity projects – such as stadiums, casinos, convention centers, and shopping malls – to stimulate economic growth. But, while such projects may attract limited out-of-town revenue, they are more likely to recirculate local money. At the same time, they fail to capitalize on rising demand in global markets – for which the growth of emerging-market cities is largely responsible.
According to the Brookings Institution’s recent Global MetroMonitor report, the 300 largest cities and metropolitan economies worldwide contain only 19% of the world’s population, but account for 48% of global GDP and 51% of recent GDP growth. Developing-country cities accounted for 24% of global growth in 2012, up from 20% in 2007. Given that most of the world’s population now lives in urban areas, cities’ potential as engines of the global economy is greater than ever.
Global trade is not pleasant; it is fiercely competitive, and policymakers must address the short-term costs that it routinely imposes on people and places. But global trade also provides a route to long-term prosperity – one that runs squarely through cities. Two millennia after the opening of the Silk Road, a global network of trading cities is beginning to reemerge. Local and national trade policy should aim to advance this process.
Why just trade.. Most economic activity was centred around cities. High Time their role in economic and social development is given the due they got earlier..