Poor mobility limits the productivity benefits of cities

Cities make firms more productive by bringing workers, customers, suppliers, and ideas closer together. Yet in many rapidly growing cities in developing countries, severe congestion makes physical proximity deceptive: firms may be located close to one another yet remain difficult to reach. A recent paper shows that this distinction matters. Density generates productivity benefits, but they vary considerably across cities and are substantially smaller where mobility is poor, particularly where congestion is severe. A city can therefore be physically dense but economically disconnected. To reduce the erosion of economic benefits in dense cities, governments can implement anti-congestion policies as they work toward improving urban connectivity infrastructure.

Mobility

The evidence on whether firms in developing countries’ metropolitan areas benefit from agglomeration economies—the productivity gains through sharing, matching, and learning in a city—is mixed. Some studies find strong urban density effects similar to those observed in developed countries, consistent with the idea that clustering allows businesses to share resources and learn from one another, match with workers and suppliers more efficiently, and improve market access. Others find evidence of “sterile” agglomerations due to diseconomies such as traffic congestion, crime, exposure to pollution and disease, and greater competition for centrally located real estate. The literature suggests that these differences partly reflect different choices for outcomes (nominal wages versus productivity measures) and differences across industries (manufacturing versus services) and types of labor (skilled versus unskilled).

A recent paper examines another possible source of this variation: differences in urban mobility, differentiating between slow traffic throughout the day and very slow traffic during peak business hours due to congestion. When movement within a city is slow, the effective distance between workers, firms, and consumers increases, reducing opportunities for sharing, matching, learning, and market access. In developing countries, such mobility issues may also entrench informality in unequal cities. Slow traffic throughout the day due to poor road networks makes it difficult to reach distant low-income neighborhoods, while very slow traffic due to congestion makes even nearby poor neighborhoods difficult to access.

Measuring density, mobility, and firm productivity

To investigate how mobility problems reduce firms’ returns to density in the developing world, the paper combines geocoded firm-level data from the World Bank Enterprise Surveys with a unique global database of urban mobility indices built from more than 530 million simulated trips on Google Maps. The final sample includes 38,526 firms located in 356 metropolitan areas across 80 developing countries.

The mobility data distinguish between two related but different challenges: low uncongested travel speeds (slow movement even when traffic is light) because of poor road quality or underdeveloped road networks) and much lower speeds due to congestion delays, captured as the additional travel time caused by peak-hour traffic. The distinction matters because these problems have different origins and may require different policy responses.

The paper finds that urban density generates productivity gains for firms, but these gains are substantially smaller when mobility is constrained. The implication is that cities are unlikely to realize the full returns to densification unless urban growth is accompanied by improvements in connectivity and accessibility.

Extremely low speeds due to congestion emerge as the more powerful constraint compared with slow traffic throughout the day, because it more severely weakens firms’ ability to do business in dense urban environments. The estimates presented in the paper suggest that the erosion of agglomeration economies due to congestion is approximately 2.5 times larger than the erosion associated with slow traffic due to poor city roads.

Not all firms are equally affected

Firms operating in nontradable sectors—such as retail, restaurants, local services, transportation services, and personal services—are more vulnerable to congestion constraints than manufacturing firms because the production and consumption of these services take place at the same time and place. Businesses offering nontradable services therefore depend heavily on face-to-face interactions and local markets for workers and customers. When congestion increases travel times, their effective market size shrinks. Customers and workers are less willing to travel, and business interactions become more costly.

Manufacturing and export-oriented firms appear less exposed to these constraints because they rely more on global transactions and less on local demand. Although manufacturing workers must travel to their factories, these facilities are often located on the outskirts of cities, in more remote but less congested neighborhoods. Firms also have more ways to adapt, for example, by providing transportation services for their workers, adjusting their work or shipment schedules, and holding inventories. As a result, their productivity gains from density are less severely reduced by traffic congestion. Similar patterns appear when comparing nonexporting firms with exporters and domestic firms with foreign-owned firms. The latter are better capitalized than domestic firms and therefore have funds to adapt. They also have more affluent customers who can afford to travel longer distances or live in proximity to these companies, which are typically located in central business districts.

Policy takeaways

The debate about urbanization in developing countries often focuses on whether cities are too crowded. This study suggests a different perspective: the problem is not density itself, but the inability to move efficiently within dense cities. The central policy challenge is therefore to make density work by coordinating urban development, connectivity, and accessibility.

Improving mobility and reducing congestion in fast-growing developing countries’ metropolitan areas is a complex task, which requires financing and well-implemented, multipronged strategies. These often combine long-term plans for mass transit system development with policies that increase the relative attractiveness of public transportation (for example, through congestion pricing, parking charges, and fuel subsidy cuts), align land-use planning with transportation investments, and improve digital connectivity to reduce travel needs and ease pressure on transport networks.

The new research does not identify which individual intervention is most effective, and the appropriate combination will depend on local conditions. However, it strengthens the case for congestion pricing because it shows that each driver imposes an externality not only on those behind them in traffic but also on firms and people across the city through diminished agglomeration economies. The policy conclusion is that local governments should prioritize anti-congestion measures while implementing their long-term plans for developing well-functioning urban connectivity infrastructure. This way, fast-growing cities will be able to realize the full productivity benefits of densification.