Economic Growth Slowing in Major Latin American Cities

Throughout the 20th century, flagship Latin American metropolises were the key drivers of the region’s economic progress, production growth and increasing domestic demand. In 2012, nearly 30% of the region’s GDP derived from just 15 major cities. However, over the last decade, Latin America’s economic growth momentum has been shifting from the major metropolises towards lower-tier cities.

Real GDP Growth in Major Latin American Metropolises and Their Respective Countries, 2005 and 2012

Source: Euromonitor International

The contributions of major Latin American cities to their respective national economies have declined throughout the region. In 2005, 10 out of 15 flagship Latin American urban economies were performing above national levels in terms of real GDP growth, while in 2012 there were only six. The decentralisation of economic activity in the region is also being confirmed by demographic changes. Over 2005-2012, 12 out of 15 major Latin American cities saw their populations expand at a rate below the national average.

Already Facing Diseconomies of Scale?

There are several reasons for changes in economic balance in Latin America, including more liberal economic policies, which encourage the rise of economies outside the largest cities in the region. However, the declining economic performance of large Latin American cities seems to be intrinsically related to emerging diseconomies of scale, with the negative externalities of urban development starting to outweigh the benefits of large metropolises. In light of this, establishing an efficient growth path for lower-tier cities is crucial for Latin America, the world’s most urbanised developing continent.

Nonetheless, major Latin American metropolises are expected to continue to remain prime centres for the growth of high-value added businesses in the region due to strong demand for skilled workers, who usually reside in cities. For example, in 2012, people with a higher educational attainment in Buenos Aires accounted for 23% of the population aged 15 and above, but only 9% in the rest of Argentina. In São Paulo, the respective figure was 18%, compared to only 8% in the rest of Brazil. Despite the valuable potential for productivity growth, many large Latin American cities suffer from poor urban planning, a strong informal economy and prevailing income inequality, which interfere with their economic dynamism.

Lower-Tier Cities to Receive More Attention

Despite slowing economic growth, major Latin American cities still account for a prominent part of the region’s GDP. In 2012, contributions to their respective national GDP varied from 2% for Salvador to 66% for Montevideo. However, depending on the country, lower-tier cities are expected to increase their contributions to Latin America’s economic performance in the future. Even though in 2012 many smaller cities lagged behind larger Latin American metropolises in their per capita income, they were already being increasingly eyed up by marketers in search of unexploited business opportunities, which will enable them to play an increasing role in the region’s future economic growth. For example, the FIFA World Cup, which kicks off in 2014, will be hosted by various Brazilian cities – including lower-tier ones – and will attract significant global attention. If adequately exploited and matched with respective infrastructure and planning improvements from the local authorities, the above described changes might become a turning point for economic development in some of Latin America’s lower-tier cities.