Greater Mekong: urbanising quicker than expected

The Greater Mekong region has undergone a significant transformation of its economic structure in recent decades, leading to rapid urbanisation.

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Evidence shows agglomeration economies have indeed played out and translated into significant productivity enhancements and strong economic performance.

" The trend of increasing urbanisation certainly bodes well for the region’s longer term economic prospects.”

Moreover, ANZ Research contends the pace of urbanisation will be faster than the median estimates from the United Nations.

The recent intensification of relocation of manufacturing facilities out of China and the associated reorganisation of regional supply chains will play a role in catalysing the industrialisation process and thereby urbanisation. This bodes well for the economic prospects for the regional economies and also provides governments with an active policy tool.

There is ample potential for these economies to continue to enjoy the productivity gains from urbanisation. The challenge for governments is to synchronise urban planning nationally and integrate aspects of economic policy, infrastructure development, connectivity and human capital investment in their design.

The trend of increasing urbanisation certainly bodes well for the region’s longer term economic prospects. Promoting urbanisation could hold the key to sustaining economic performance. The benefits of urbanisation are, however, not automatic. Combating its negative externalities will remain a policy challenge.

The economic structure of the Greater Mekong region has undergone a significant change in the past two decades. Traditionally characterised by a large agrarian base, economies in the region now generate 25 per cent or less of their gross value added (GVA) from the agriculture sector. Furthermore, agriculture engages less than 40 per cent of the workforce in Thailand, Vietnam, and Cambodia.

In the absence of opportunities elsewhere, the pace of transition in Myanmar and Lao People's Democratic Republic (PDR) has been somewhat muted. The trend is also reflected in the pace of urbanisation, with variation across countries widening over the period. While Thailand’s urbanisation rate shot past 50 per cent this year, 70 per cent or more of the populations in Myanmar and Cambodia continue to reside in rural areas.

All that will likely change given a major reorganisation of manufacturing supply chains currently underway in East and Southeast Asia. While median estimates published in the United Nations’ (UN) World Urbanization Prospects (WUP) database suggest it might take Vietnam and Lao PDR another two decades to get to where Thailand currently is, ANZ Research thinks the transition could be faster.

For one, the UN itself has pushed up its urbanisation forecasts in successive editions of its WUP publication. More significantly, recent evidence based on state-of-the-art methods suggest we could be under-estimating urbanisation based on traditional definitions of what constitute urban areas.

Irrespective of what definitions we apply and the urbanisation rates we derive, it is certain the trend will intensify.

Urbanisation-growth link

The relationship between urbanisation and economic growth has received considerable academic, as well as policy, attention in recent decades. Certainly, the two seem to reinforce each other. Rising urbanisation is associated with higher per capita gross domestic product (GDP).

Interestingly, per capita income growth also seems to pick up pace at higher rates of urbanisation.

The spatial concentration of resources facilitated by urbanisation improves productivity and economic growth prospects through various channels. It delivers better economies of scale in the provision of physical and institutional infrastructure, enables specialisation, reduces search and transaction costs, and provides for complementarities in production.

Moreover, close interaction among individuals, organisations and the government ensure spill-over effects in the form of better sharing of knowledge and ideas, which are considered critical for fostering innovation.

In the ASEAN-5 economies, on average, urbanisation and per capita income seem to have moved in tandem till the late 1980s when they were about 35 per cent urbanised. Thereafter, barring the crisis years, per capita income growth has far outpaced growth in urbanisation.

Presumably, until the 1980s, the dominant source of productivity gains was the shifting of resources from agriculture to more productive manufacturing and service activities. Thereafter, improvements specific to the manufacturing process or service delivery may have enhanced productivity and growth.

The ‘take-off’ point at which income growth begins to outpace urbanisation varies across economies, each with their unique economic structure and circumstances.


Khoon Goh is Head of Asia Research at ANZ and Arun Navaratna is Senior Economist, Institutional at ANZ


The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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