The World's 10 Most Powerful Cities

02/29/2012 7:15 am EST

Focus: GLOBAL

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

The list is far from perfect, but it puts how global growth is changing in perspective, writes Nicholas Vardy of The Global Guru.

If you've ever visited friends in New York City, you've probably wondered why so many people are willing to put up with such lousy living conditions for so much money. But New York is not alone.

I spent last Friday in the company of a group of newly arrived Eastern European diplomats who were appalled by the living conditions they've had to put up with in London, compared with the creature comforts available to them in global hot spots such as Belgrade, Serbia, or Bucharest, Romania.

This morning, I went to see an apartment in a building where a 19-year-old Lady Diana, the future Princess of Wales, lived when she was a kindergarten teacher before meeting Prince Charles. You can move in tomorrow for a mere $2,050 per week. No wonder London has become home to the "global 1%," consisting of an endless supply of Russian oligarchs and Saudi princes.

Despite this high cost, more people than not choose to congregate in the cramped confines of large cities. Last year marked the first time in human history that more people lived in cities than in the countryside.

Whether it's economists like Paul Romer or public intellectuals like Richard Florida, City Gurus agree that the concentration of land, labor, and capital play a key role in shaping economic growth.

Cities and their surrounding metropolitan regions are the economic engines of the global economy. They bring together talented, ambitious people and help stimulate the innovation and enterprise that spur long-term economic growth and prosperity. Globally, cities with over 1 million people account for more than half of the world's economic output, and nine of every ten innovations.

As Richard Florida has pointed out, even in a large, spread out country like the United States, cities account for nearly 90% of total economic output, and generate 85% of US jobs. That's why you can't throw a rock in Silicon Valley without hitting a delegation of foreign visitors trying to discover the secrets that produced an endless stream of high- tech successes including Google (GOOG), Apple (AAPL), eBay (EBAY), Yahoo (YHOO), and HP (HPQ).

To measure the impact of the world's leading cities, Florida developed The Global Economic Power Index, which reflects three key three dimensions of economic power—economic, financial, and innovative.

Economic power is measured as economic output or gross regional product. Financial power is based on the Global Financial Centers Index, which ranks the banking and financial power of cities across the world. Innovation is based on patenting activity.

With that, here are, according to The Global Economic Power Index, the world's ten most economically powerful cities, based on data in 2005, the latest available:

#1—Tokyo
Economic Output: $1.2 trillion
Global Economic Power Score: .992
Financial Center Score: 697
Innovation Rank: No. 1

#2—New York
Economic Output: $1.1 trillion
Global Economic Power Score: .984
Financial Center Score: 770
Innovation Rank: No. 4

#3—London
Economic Output: $452 billion
Global Economic Power Score: .935
Financial Center Score: 772
Innovation Rank: No. 8

#4—Chicago
Economic Output: $460 billion
Global Economic Power Score: .915
Financial Center Score: 678
Innovation Rank: No. 7

#5—Paris
Economic Output: $460 billion
Global Economic Power Score: .882
Financial Center Score: 645
Innovation Rank: No. 5

#6—Boston
Economic Output: $290 billion
Global Economic Power Score: .854
Financial Center Score: 655
Innovation Rank: No. 6

#7—Hong Kong
Economic Output: $211 billion
Global Economic Power Score: .846
Financial Center Score: 760
Innovation Rank: No. 9

#8—Osaka
Economic Output: $341 billion
Global Economic Power Score: .821
Financial Center Score: 601
Innovation Rank: No. 3

#9 [Tie]—Washington, DC
Economic Output: $218 billion
Global Economic Power Score: .813
Financial Center Score: 621
Innovation Rank: No. 2

#9 [Tie]—Seoul
Economic Output: $299 billion
Global Economic Power Score: .813
Financial Center Score: 649
Innovation Rank: No. 10

#10—Sydney
Economic Output: $172 billion
Global Economic Power Score: .756
Financial Center Score: 660
Innovation Rank: No. 12

Many of the names in the Top Ten are predictable enough. Perhaps you're surprised that Tokyo takes the top spot, besting New York and London. But with a population of 35 million—almost the size of California—and nearly $1.2 trillion in economic output, Tokyo is the world's largest urban economy. Only New York comes close, with $1.1 trillion in output.

Individually, both Tokyo and New York would rank among the world's top 15 economies. Both are slightly smaller than Canada or Spain, but are larger than India, Mexico, and South Korea.

That said, some of the results of the survey left me scratching my head.

  1. For all of the talk of US decline, four of the top ten cities are in the United States.
  2. As an American, you may find that reassuring. But you'd be shocked at how much that angers grumpy foreigners who revel in the idea of the United States' inevitable decline.

    In fact, I would argue that the United States is underrepresented in this list.

    For one thing, California—the world's eighth-largest economy—seems to have fallen into the ocean. San Francisco, including Silicon Valley, is nowhere to be found. Los Angeles—the second-largest city in the United States and home to Hollywood—is also curiously absent. Neither city even makes it into the top 25, while Boston, Chicago, and Washington DC are in the top 10.

    Meanwhile, Canada, whose economy is smaller than California's, has three cities in the top 20—Toronto, Montreal, and Vancouver. Sure, Canada is nice. But its overwhelming presence in the top 20 is more wishful thinking than a measure of true impact.

  3. There isn't a single German city on the list.
  4. Not even Frankfurt, the financial and industrial heart of the world's third-largest economy. You'd figure that 80 million Germans exporting as much as 1.3 billion Chinese, all the while still bailing out their ne'er-do-well Southern European neighbors, would merit some sign of recognition.

  5. Speaking of China—where is it on the list?
  6. Hong Kong is technically Chinese, but Shanghai—which aspires to be the premier global financial center by 2020—is also conspicuous by its absence. Ditto for China's capital, Beijing.

  7. There are two Japanese cities in the top 10.
  8. And if you're like me, you would not have pegged Osaka at No. 8 in the world. At the same time, Australia boasts two cities—Sydney and Melbourne—in the top 20.

With all of its faults, Florida's list does remind you that as far as global economic impact is concerned, you're better off thinking about cities than countries.

Yet, no matter how you slice and dice it, the United States still has an enormous lead over the rest of the world. Let's just hope we can keep it.

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