Government leaders at all levels—national, state, and city—are concerned about growth. Emerging economies have recently fared better than their more developed counterparts, but most of their leaders are worried about what lies ahead. One of the most encouraging recent developments is urbanization and the economic benefits that go along with it. More than half of the world’s population already lives in cities, and it’s likely that another one billion people will by 2025; more than 90 percent of these new city dwellers will live in developing countries. As a result, the urban world’s center of gravity will shift to the south and, even more decisively, to the east. Almost 53 percent of the world’s urban population will live in Asia.
However, recent history has shown that, even given the same set of national conditions, the ability of cities to deliver growth can vary tremendously. Broad economic trends have changed the fortunes of cities throughout history, with Venice, Seville, Manchester, and Detroit as just a few examples. Yet quite often, the difference in growth comes down to how cities are managed. Rapidly growing cities are highly complex, demanding environments that require effective policy over a long period. Many fast-expanding urban areas are not prepared for their burgeoning populations, and as a result they experience pollution, congestion, and localized water and energy shortages. If leaders and policy makers do not properly tackle the management challenges of rapid growth, they risk having their cities become synonymous with gridlock, slums, urban sprawl, and a deteriorating quality of life. However, the relative decline of weakly managed large cities is not irreversible.
Over the past several years, the McKinsey Global Institute has extensively studied the challenges associated with urbanization, particularly in the leading emerging urban markets: China, India, and Latin America. Most recently, we developed a tool, the Urban Performance Index (UPI), that allows cities to benchmark themselves against their international counterparts on four critical criteria: economic performance, social conditions, sustainable resource use, and finances and governance. This article focuses on our findings regarding finances and governance in the three regions we studied. Without a strong foundation in these areas, cities will have difficulty achieving their policy goals related to sustainability and delivery of services, which have obvious implications for economic performance and social conditions. We hope that by highlighting some of the past problems, successes, and future challenges in China, India, and Latin America, we can help rising cities in these and other areas develop insights on how to keep their finances healthy, ensure that they have accountable governance, and see that urban planning is done over a sufficiently long-term period.