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Wednesday, 28 September 02:48 (GMT -05:00)



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How Does Urbanization Influence Economies, Investments And US Dollar Exchange Rate?


Last week Credit Suisse Group released a sensational report. According to it, the urban population of emerging economies will make 50% of the global population by 2037. It appears that the analysts show investors which countries (and currencies) they should pay attention to when planning long-term investments. The list includes: China, Egypt, India, Indonesia, Nigeria, Pakistan, Philippines, Thailand and Vietnam . They also provided the list of those countries that will lose their investment attractiveness due to excessive urbanization. These are the USA, EU states etc.

What are the reasons behind such conclusions? Should we trust Credit Suisse’s forecasts?
 
Urbanization
According to Eugene Olkhovsky, Masterforex-V Academy’s leading expert from Canada, in a broad sense, urbanization is a complex social, economic, demographic and geographical process connected with increasing the role of cities in the modern society. In a narrow sense, this is just the growth of cities and their population as compared with the rural population.
 
The contemporary urbanization is different from those seen hundreds of year ago. Previously, cities used to grow only at the expense of migrating rural population and foreigners. These days, apart from migration, there are 2 more factors contributing to urbanization: villages turn into towns while big cities get surrounded by vast suburban areas. As more and more suburbs are built around big cities (usually, big industrial and administrative centers or capitals), they turn into metropolises.
 
For now, there are over 20 metropolises with over 10 million people living in each of them: Sao Paulo and Rio de Janeiro (Brazil), Tokyo (Japan), New York (USA), Shanghai and Beijing (China), Bombay (India), Jakarta (Indonesia), Moscow (Russia). Mexico remains the world’s biggest city (25.8 million people).
 
Another outcome is the so-called “rurbanization” – it is when urban lifestyle spreads over rural areas.
 
Megalopolises represent the ultimate stage of urbanization. This is the merge of several metropolitan areas. It means that you can move from one city into another without leaving the urban area. Here are some examples: Blue Banana (Dublin, Liverpool, Manchester, Leeds, Sheffield, Birmingham, London), Taiheiyo Belt (Chiba, Tokyo, Kawasaki, Yokohama, Nagoya, Kyoto, Osaka, Kobe, Hiroshima), Northeast Megalopolis (New York, Boston, New Jersey, Washington, D.C., Baltimore, Philadelphia, Hartford, Richmond, Norfolk), Great Lakes Megalopolis (Chicago, Toronto, Montreal, Ottawa, Detroit, Pittsburgh, Milwaukee, St. Louis, Minneapolis, Indianapolis, Cleveland, Cincinnati, Dayton, Columbus, Grand Rapids, Toledo, Akron, Rochester, Buffalo).
 
Indeed, the pace of global urbanization is shocking:
In the 19th century the global population increased by 1.7 times while the urban population quadrupled. In the 20th century the stats increased by 3.7 and 13.3 times correspondingly. In 1950-2000 the amount of urban citizens increased by 400%. During the period of 1991-1995 it increased by 61 million people a year while the rural population of the world kept increasing only by 25 million people.
 
According to the UN, within the first 2 decades of the 21st century the urban population of the world will increase up to 5.1 billion people. The future urbanization will take place mainly at the expense of emerging states as 90% of the rural population lives there.
 
Can you believe it? Today almost 50 % of the global population lives in cities, which occupy only 1% of the land.
 
The future belongs to emerging economies
 
In the early 1990s the level of urbanization in developed countries reached 72% while emerging economies were lagging far behind with 33%. However, the situation is changing rapidly. In 1950 the share of urban citizens was only 19-20% while in 1990, it increased up to 38-40%. In 2000 it reached 45% and is nearing 50%.
Emerging economies will keep boosting their manufacturing industries and investing in human capital and innovation technologies, which will obviously contribute to the growth of their cities.
 
The urbanization prospects in emerging countries are especially high as most citizens are young (2/5 of them are under 14). It is especially true of Latin American countries (with over 70% of the population living in cities). As for China, India and some African countries, it is 40% or roughly 1 billion people. According to some forecasts, the share of urban citizens in Africa is expected to touch 50% in 2030.
 
In terms of the level of urbanization, all the countries around the globe can be divided into 2 groups:
 
Highly-urbanized countries (the share of urban citizens is over 50%). These are the countries of North and South America (except Bolivia, Guatemala, Honduras, Salvador, Costa Rica, Haiti and Dominican Republic) Australia, West European States (except Portugal ), Japan, Mongolia, Kazakhstan, Baltic states, Russia, Ukraine, Belarus, South Africa, Tunis, Libya, Saudi Arabia, Iraq, Kuwait etc.
 
Moderately-urbanized countries (the share of urban citizens is under 20%). Afghanistan, Nepal, Laos, Butan, Bangladesh, Ethiopia, Somali, Madagascar, Botswana, Uganda, Burundi, Mali, Niger, Chad, Burkina Faso, Ghana, Tonga, Sierra Leone, Guinea.
 
Why is urbanization beneficial for investors?
Urbanization favors the development of economies. There is direct connection between the urbanization and GDP growth. According to some estimations, each 5% increase in a country’s urban population causes a 10% GDP-per-capita increase. Those countries with 30-50% of urban citizens can boast record-high GDP-per-capita growth. According to Credit Suisse, as soon as a county’s level of urbanization exceeds 40%, its economic growth reaches the climax (the annual GDP growth is roughly equal to 8%). Therefore, urbanization directly influences production, demand and investments.
 
 
Urbanization stimulates multiple industries, including construction and machine-building industries, metallurgy, services and banking sectors, information technologies, mass media etc. Higher concentration of production and capital results in higher quality of life in megalopolises.
 
There is false urbanization. Investors should consider this factor as well. It emerges when a substantial increase in the amount of urban citizens is not attended by a considerable increase in the amount of new jobs. Ex-rural citizens start replenishing the unemployed army. They live in slum areas. This is especially true of third-world countries.
 
 
 
How does urbanization influence the US Dollar and other major currencies?
In terms of fundamental analysis and Credit Suisse’s recommendations, this is an unstudied question. Eugene Olkhovsky assumes.
 
However, those countries that show a fast pace of urbanization can see their national currencies gaining value against the US Dollar.
 
The following national currencies can boast positive dynamics against the US Dollar:
 
The Russian Ruble:
 
 
The Hungarian Forint
 
 
The Turkish Lire
 
 
The Czech Koruna
 
 
The South African Rang
 
 
 
Market Leader and Masterforex-V Academy would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:
 
In your opinion, is there correlation between the US Dollar and the national currencies of the countries fast urbanization?
 
 
 
 
 

 

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