It is commonplace to think, as Adam Smith did, of the wealth of nations. Two centuries later, with Smith as relevant as ever, we think of “national competitiveness”. I would argue that to complement the debate on policies and institutions that enhance national productivity another factor should be taken into account. We should also try to understand how city economies can be harnessed for economic, political and social gain.

More than ever, cities – especially “global cities”, from London to Beijing – are the lifeblood of the global economy, accounting for account for over 80% of the world’s GDP. The competitiveness of cities increasingly determines the wealth of nations, regions and the whole world.

The map of the global economy most of us have in mind is one of nation states connected to each other via flows of trade, capital, people and technology. That is still highly relevant. But throughout history the most intensive cross-border economic transactions have been between cities – most of them on the coastline. Today, the bulk of international trade by volume is still ocean-going trade between coastal cities, only now it is conveyed by huge container ships.

So think of a different map of the global economy: one of cities connected across land borders, seas and oceans through the exchange of goods and services, foreign investment, migrants and short-term workers, and border-hopping technology. Given the enduring importance of national competitiveness, such a map is a complement – not an alternative — to an inter-national map of the global economy.

Unprecedented levels of urbanization make this city-based map particularly relevant. Three years ago, for the first time in history, over half the world’s population lived in cities. According to McKinsey Global Institute, as of 2007, 1.5 billion people (22% of the world’s population) lived in the world’s 600 most populous cities and accounted for a GDP of USD 30 trillion – well over half of global GDP.  The top 100 cities, with a GDP of USD 21 trillion, accounted for 38% of global GDP. In 2025, McKinsey reckons, the top 600 cities will have 25% of the world’s population and nearly 60% of global GDP.

The World Economic Forum’s annual Global Competitiveness Report 2013-2014, published today, identifies the policies and institutions that boost national productivity and determines competitiveness and economic growth. But what can nations learn from cities when it comes to building sustainable, long term economies?

Most productive policy innovation is happening in cities and regions. Policy-making is more flexible and practical the closer it is to the citizen. And this is more conducive to all-round learning and adaptation: cities emulate each other and adopt best international practice often better than do nations.

This is true of cities and state governments in the United States, while Washington DC remains gridlocked. In the EU, national governments and EU institutions are stuck with failed policies. Can Europe’s cities break out of this straightjacket and unleash long-delayed reforms?

This century’s story of cities and the wealth of nations will be scripted mainly in the emerging world – outside the West. Asian cities, stretching from India to China and Northeast Asia via Southeast Asia, will be the main players. McKinsey Global Institute’s list of top 600 cities includes 220 from developing countries. But it estimates that, by 2025, 136 new cities will join this list – all from developing countries. Of the new entrants, 100 will come from China alone.

What are the ingredients that make cities more productive? Some vital policies are parochial: urban planning and zoning, housing, water, sanitation, policing and so on. But the most successful cities, like the most successful nations, also have the following: stable and solid public finances; low, simple and competitive taxation; simple and transparent business regulation; strong and impartial rule of law; openness to international trade and foreign investment; a welcoming environment for “foreign talent”; good “hard connectivity” – roads, transit systems, ports, airports; and good “soft connectivity” – education, skills and technology diffusion. Like nations, cities with limited – but effective – government and competitive markets do better than cities with big, inefficient government and distorted markets. This reinforces the message that there is a good deal of overlap between city competitiveness and national competitiveness.

My role models are the city-states of Hong Kong and Singapore. Both regularly top the rankings of the Global Competitiveness Report, the World Bank’s Doing Business Index and the Simon Fraser Institute’s Economic Freedom of the World Index. Government is relatively small, clean and efficient, and markets are relatively competitive and highly globalized. Nowadays, Hong Kong and Singapore are the logistics and services hubs for Asian trade. Modern global supply chains plug them into other cities in Asia and beyond.

To me, free markets and free trade form a trinity. First, they promote growth and prosperity – the economic imperative. Second, they enhance individual freedom – the moral imperative. And third, they, more than anything else, sustain peaceful international relations – the geopolitical imperative. I think of cities in this context. They might indeed be among the best available political-economic units to promote prosperity, freedom and peace.

Explore our competitiveness tracker.

Competitiveness at a glance: See how well different countries perform on our latest Global Competitiveness Index.  

Author: Razeen Sally is Visiting Associate Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore, and Chair of the Global Agenda Council on Competitiveness of the World Economic Forum.

Image: A woman looks at Beijing’s skyline REUTERS/Jason Lee.