United States. Such focus on manufacturing was not unique to New York. Kolko (1995) shows that, in 1910, the four largest U.S. cities had 35 percent of their employment in manufacturing, with shares moving down the urban hierarchy to the rural sector (at 25 percent). Big cities were manufacturing engines of growth.

During this period, before rail commuting and cars and continuous process production (on a single floor), New York’s manufacturing developed in dense, five- and six-story buildings, and its population lived in similarly dense neighborhoods. Over the last 60–70 years, New York has deindustrialized and transformed into a service center. In 2002, 24 percent of employment in Manhattan was in professional, scientific, or technical services or in security and commodity contracts.<sup>1</sup> From a different perspective, in 1997, while Manhattan had 1.8 percent of the nation’s total employment, it had 12 percent of national employment in financial headquarters, 12 percent in financial services, and 8 percent in business services, with 15 percent of advertising. Manhattan’s historical high density has been central to its role as a service center. Arzaghi and Henderson (2008) estimate the high productivity benefits of very close spatial proximity, or density, of producers trading information. Close spatial proximity seems to most benefit services like advertising, which then out-compete manufacturers for these locations with their expensive land and high-priced labor.

Note:

1. Glaeser 2005.

As development proceeds, manufacturing decentralizes from these large cities in two stages (as in the United States). First is decentralization to periurban or suburban areas of these cities. Second is decentralization from these metropolitan regions to hinterland areas, small cities, and rural areas. Henderson (2010) presents this process for the Republic of Korea and Japan. World Bank (2012a) also looks at the Korean example and links decentralization to the widespread transport and communications infrastructure investments that the Republic of Korea made in the early 1980s.

As another example here, I consider 108 Chinese metropolitan areas for which there are good 1990 GDP data. For the first stage, in 1990, the nine largest metropolitan areas had about 85 percent of industrial GDP produced in their center cities as opposed to periurban areas (the rest of the prefecture); by 2005, this share had fallen to just over 60 percent, in a period during which the population share of these center cities actually increased modestly. For the second, now emerging stage, in 1990 the ratio of the share of industrial GDP of the nine largest cities in all 108 cities to the share of total GDP of the nine largest in all 108 was 1.05. By 2005, this figure had fallen to about .87. That is, the nine largest are changing from being more industrial than other cities to being substantially less industrial.

Box 3 considers recent decentralization in India and consequently raises another issue. We have painted decentralization here as a positive development. However, there may be premature decentralization in India and a loss of agglomeration benefits. Firms are driven from cities because of poor environments: poorly allocated infrastructure investments, a lack of public utilities, and inappropriate land market regulations. Bertaud and Brueckner (2005) discuss how land market regulations (limiting floor-area ratios) in Mumbai have led to sprawl and inefficiently low densities near the city center. This may result in a costly lessening of agglomeration benefits.<sup>17</sup> 9