Interconnectedness and specialisation is one of four scans that forms part of The Economics of the Built Environment theme for RIBA Horizons 2034.
The built environment is composed of structures where people live and work. Economic forces combine with historical, cultural and institutional factors to determine the location of these structures. They also determine the forms they take and shape the economic geography of countries, regions, cities and towns. This chapter outlines these forces, reflects on how they have changed and might continue to do so, and speculates on the implications of such changes for the built environment.
Economic geography is shaped by the trade-off between the benefits and the costs of proximity. Benefits arise from social interaction and the fact that, to be productive, people in most lines of work need to be close to other people. A thriving market needs lots of buyers and sellers: businesses want to be close to customers and suppliers, and workers want to be close to employers.
There are benefits from economic scale and spatial density. These can be achieved within a particular organisation, such as large factories, hospitals, universities or theatres. They can arise between separate businesses, where clustering in close proximity creates high productivity through various synergies (agglomeration economies). Activities such as research and development (R&D), finance, and creative sectors cluster to benefit from these synergies.
Pulling in the other direction are the costs of proximity, above all the facts that space is limited and that travel (to bring people into close proximity) costs time and money. Building tall can add floor space, but this too is expensive. To these costs can be added those of congestion, pollution, and anti-social behaviour.
These two forces are mediated through two mechanisms: the market, in particular for land and built structures, and good governance. Markets can support efficient outcomes; for example, rents are high in city centres, ensuring that land is occupied by those who most value economic density. But markets alone do not secure good spatial outcomes. Effective governance is essential to provide infrastructure and to shape cities in ways that support urban productivity.
The remainder of this scan looks at recent, and possible future, developments that change the balance between these economic forces. What are their implications for how space is used, how urban areas are shaped, and how buildings get constructed?
The structure of employment: what people do
Economic development has been accompanied by massive changes in the structure of employment and the built environment. The shift from agriculture to manufacturing and services drove urbanisation. Technical change in manufacturing, together with competition from emerging market economies, drove the shift from manufacturing to services, a change that hit many traditional manufacturing areas hard.
At the same time, some places developed high productivity centres of service- and knowledge-intensive activities, particularly clusters of finance, business services, and high-tech, which transformed their urban centres.
These transformations will continue. In developing economies, the urbanisation process is far from complete, and may be hastened by climate change. See, for example, Abimbola Windapo and Alice Moncaster’s horizon scan about mitigating carbon emissions. China’s urban population has increased by around 700 million over the last 50 years, and Africa’s is predicted to increase by that much – an amount similar to the total urban population of the EU and North America – over the next 25 years.
However, the nature of urban employment in developing countries is changing, with discussion of ‘premature deindustrialisation’. The model of large factories (often export-oriented) around which many East Asian cities have grown is now being questioned. Some countries are looking to international trade in services (e.g. call centres or routine data processing) to fill the gap, but there are doubts about the employment creation potential of these activities.
In high income countries, there are likely to be changes in the structure of service employment, with faster growth in personal services (which are spatially dispersed) than in business and financial services (which have a propensity to cluster in central areas). Several forces will be at work. One is the demographics of an ageing population, requiring an ever-larger share of the labour force to be involved in personal and health-related services. Another is the development of AI, raising productivity in some service sectors, probably including finance and business services.
It remains unclear how the development of AI will play out, but several observations are possible. One is that AI is likely to be labour-augmenting, rather than labour-displacing: it will improve the performance of workers, rather than substitute for them. Another is that these effects may cut in very rapidly.
It took 40 years or so for production techniques to fully adjust to electricity, and the productivity effects of ICT have been slow coming through. But generative AI is catching on fast. For example, ChatGPT reached 100 million users in 60 days and firms are achieving double-digit productivity gains within a few months of commencing use. [2] There will be changes in the structure (for example, the skills mix) of workers employed in many sectors, and this is likely to affect the physical form of their workspaces.
Connectivity and transport
Improvements in transport and connectivity have double-edged effects. They reduce the costs of economic proximity (by bringing down the time and monetary costs of commuting, for example), thereby enabling cluster formation and the emergence and growth of cities. At the same time they can reduce the benefits of proximity; why should businesses cluster together if they can interact easily over long distances?
To break this down, consider first the costs of transporting people and goods. Technological improvements reduced these costs through the 19th and much of the 20th centuries, enabling trade, international specialisation, and urbanisation.
Transport technologies and their costs are now changing relatively slowly, and only one quantitatively important feature stands out: the age of the motor vehicle is not over. Electric vehicles (and possibly autonomous vehicles) are likely to reduce motoring costs, particularly given the small chance that governments will develop effective tax instruments to replace fuel duties.
The costs of transporting ideas and knowledge fell dramatically with the ICT revolution from the 1980s on. This led to literature about the ‘death of distance’ [3] and the idea that activity would deconcentrate as workers – in some sectors, at least – no longer needed face-to-face contact. Smaller towns and provincial centres would prosper, while cities such as London (where the population had been falling) would become unnecessary.
In fact, the reverse happened, due largely to the growing importance of knowledge-intensive sectors (business services, creative sectors, R&D). These require the benefits of face-to-face interaction: high frequency communication, the transfer of tacit knowledge, and ability to read body language and develop trust. The growth of these sectors was concentrated in relatively few places, which experienced increases in density and land prices.
As noted above, as these places boomed so other places (in which structural change had removed traditional manufacturing activities) lagged or experienced absolute decline – a problem that was particularly pronounced in the UK and parts of the US.
Distance has not died over the last half-century, but what of the future? Further development of ICT, coupled with the effects of the pandemic, has increased working from home (WFH). This may increase productivity in some activities (those that were screen-based in any case) but cannot replace the in-person contact required in knowledge-intensive skills and might hinder the development of new employees’ skills. Nevertheless, a substantial fraction of the workforce is likely to reduce in-work days to three or four per week.
What impact does this have on the economic geography of work and residence? First, as is already apparent, there are changes in the type and quantity of office space required by firms, with increased emphasis on high quality space and collaboration facilities, and less on routine open-plan space. Uncertainty about future space needs may lead to increased demand for temporary workspace.
A bigger question concerns the attractiveness of large urban clusters relative to dispersed activity. Economic reasoning suggests, perhaps counter-intuitively, that WFH will strengthen large clusters. The benefits of in-person work interaction remain unchanged, but their cost has decreased (commuting just three days a week, not five). This is essentially a reduction in commuting costs, which has the effect of growing the travel-to-work area from which city firms can draw workers.
While employers may need less floor space, there is no incentive for them to move out of a central area or existing cluster to dispersed locations. On the contrary, running a central operation has become cheaper for both workers and employers.
Fifteen minute cities?
A radical view of the future of cities is the idea of organising urban space so that most people can reach most of the places they want to visit in 15 minutes by walking or cycling. [4] The approach combines density with decentralisation through a polycentric urban structure.
What are the prospects of this reshaping cities? The attraction (to the young and the old) of living in dense areas close to amenities, coupled with climate change concerns, is pulling in this direction. WFH might pull in the opposite direction – less frequent but longer commutes and demand for more space at home.
It seems clear that most people will continue to work, some days at least, outside their 15-minute area. Many places of employment (large factories, hospitals, universities, sports stadia, for example) are ‘lumpy’ – i.e., require scale – and offices will increasingly function as places to bring people together, not as separate fragmented units.
Efficient land use and city governance
The technological and structural forces that shape the benefits and costs of proximity are usually slow to change. Equally important, and potentially faster moving, are the policies and regulations that shape the built environment. They can harness the benefits and mitigate the costs of proximity.
Failure to manage the costs or achieve the benefits of urban centres is seen most starkly in some developing economies. Unplanned urban growth has led to sprawl, informal settlement, and failure to achieve high productivity. This failure stems from three causes. First is the high cost of providing current services and new infrastructure in fast growing cities. Second are the difficulties in enforcing land rights. Last is the limited capacity of local government to design, implement and enforce policy.
It is unclear how cities of this type will evolve, particularly given possible future employment patterns. China has provided high density housing of reasonable quality, based on strong government, a remarkably high savings rate, and at the cost of speculative over-building.
This experience offers some useful lessons, notably the importance of land value capture in financing development. But translating this model to other environments is problematic; where tried in Africa it has proved over-expensive and ill-adapted to local needs. New models of mixed-use medium-rise development and new technologies of low-cost building are badly needed.
The UK offers examples of inefficiencies in land use and spatial policy, some of which could, conceivably, be changed within a relatively short time horizon. Many UK cities have poor intra-urban transport compared to cities of a similar size in other advanced economies. [5]
This inhibits the development of integrated urban labour markets and is one of the reasons for the poor productivity performance of these cities. Effective levelling-up policy needs to provide the concentrated development push in the UK’s lagging cities that is so far lacking, as well as the inter-urban connectivity to support it.
Slow and cumbersome planning procedures impede development, and land use plans are often outdated. Building costs are high [6] and quality is often low, due in part to unsatisfactory procurement and contracting processes. Shortages in the overall housing stock are well documented and, perhaps as importantly, land taxation is not conducive to efficient or equitable housing use. Property taxation is based on outdated land values and the taxation of housing transactions (stamp duty) impedes the mobility required to ensure best use of the existing housing stock.
These issues are part of the UK’s record of chronic under-investment by both the public and private sectors. Investment as a whole in the UK runs at around 17% of GDP, compared to a range of 21 to 25% of GDP in comparator countries. [7] A return to economic growth requires raising this investment rate, with much of the spending going to infrastructure, housing, and other built structures.
From the UK perspective, the most impactful changes that can be imagined over the next decade are those to do with policy measures to raise investment and remove obstacles to the supply of new built structures, as well as supporting the efficient use of existing ones.
Author biography
Anthony J. Venables, CBE, is Senior Research Fellow at the Department of Economics, University of Oxford and a visiting professor at the Centre for Economic Performance, London School of Economics. He is a Fellow of the British Academy, the Econometric Society, and the Regional Science Association.
Former positions include chief economist at the UK Department for International Development, professor at the University of Oxford and the London School of Economics, and research manager at the World Bank. He has published extensively in the areas of international trade, spatial economics, natural resources, and economic development.
RIBA Horizons 2034 sponsored by Autodesk
References
[1] RIBA - A. Abimbola and A. Moncaster (2024). Mitigating carbon emissions: global challenge and regional priorities
[2] Financial Times - T. Parikh (31 January 2024) Erik Brynjolfsson: This could be the best decade in history – or the worst
[3] F. Cairncross (1997). The Death of Distance: How the Communications Revolution will Change our Lives. Orion Business Books
[4] RIBA Journal - Jan-Carlos Kucharek (16 December 2021). Carlos Moreno: 15 minutes to save the world
[5] Financial Times - P. Foster and J. Williams (25 January 2024). Birmingham pays the price for UK’s infrastructure gap
[6] Financial Times - S. Fleming, J. Pickard, G. Plimmer (30 January 2024). Can the UK afford to build better infrastructure?
[7] The Productivity Institute - J. Chadha and A.J. Venables (2023). Investing for the long-run. In The Productivity Agenda: a blueprint for how the public and private sector can be better equipped to translate productivity gains into improved living standards (In B. van Ark and D. Coyle eds), 20–29
