Impacts of Urbanization on Economic Development in Canada

Executive Summary

An unintended consequence of urban-rural migration occurs when the proportion of a given urban area increases, creating a corresponding decrease in rural ways of life. This phenomenon is often referred to as urbanization. Urbanization is a key area of discussion for Canadian policymakers because most of the Canadian population lives in a few metropolitan areas. This article explores the relationship between urbanization and the economy, focusing on urban density’s benefits and challenges. It looks at the impact of cities on sustainable economic development by considering the three largest metropolitan areas in Canada, Toronto, Montreal, and Vancouver.

Introduction

As of 2020, 55% of the global population lives in cities. By 2050, the urban population is expected to be double.[1] As cities are home to financial, commercial, and innovation centres, people have moved to urban centres for new career and social opportunities and the potential for higher incomes, resulting in rising urban density worldwide.

There is a lack of global consensus on what is considered to be a metropolitan area, with each country establishing its own parameters. According to Statistics Canada, a population centre is an area with at least 1,000 inhabitants and a density of 400 or more people per square kilometre.[2] Population centres are classified into three types. Small population centres have a population between 1,000 and 29,999 inhabitants, medium population centres between 30,000 and 99,999 inhabitants, and large urban population centres have 100,000 or more people.[3] All areas outside population centres are classified as rural areas.

Although they are often used interchangeably, economic growth and economic development have some fundamental distinctions that are key to understanding the relationship between urban density and economic development. Economic growth measures a country’s income and output in real terms, using the gross domestic product (GDP) as a measure. Economic development accounts for a country’s standards of living, using a broader and less precise range of measures including, but not limited to, life expectancy, housing availability and education levels.[4] It is important to differentiate between these two concepts as a country can experience an increase in GDP (economic growth) without its citizens seeing any tangible effects on their daily living standards (economic development).

Theoretically, economic growth should, in turn, catalyze a sustained increase in the economy during one or more periods through an increase in the production and consumption of goods and services. [5] This increase can be subsequently measured using indices such as GDP or gross national product (GNP). However, while economic growth occurs as a result of increased quantitative production, the enrichment generated does not necessarily improve a society’s living conditions.

Economic development is directly related to individual quality of life and the quality of life of society overall, as the measures of economic development are inherently linked to well-being. For example, the most commonly used index relating to economic development is the Human Development Index (HDI), a model using health, knowledge, and income per capita as key dimensions for measuring a society’s level of development.[6] Each dimension of the HDI model has a corresponding subset of indicators to define further and measure output. These include life expectancy at birth (health dimension), expected years of schooling versus mean years of education (knowledge dimension), and gross national income (GNI) per capita (standard of living).[7] In this model, the changes generated by economic development substantially impact a society’s quality of life.

Current Status

As of July 2020, over 70% of the people in Canada live in Census Metropolitan Areas (CMAs), population centres with 100,000 or more people.[8] However, due to the country’s size, Canada also has a low population density, at approximately four inhabitants per square kilometre.[9] Overall, most Canadians live in just a few urban centres.

Several factors determine the growth of Canadian cities. These factors include municipal tax policies, comparative advantages in economic and labour force terms, and concentration of skilled workers. Immigration has also played an important role in shaping the population of Canada’s largest cities. In the first few months of 2020, 82% of Canada’s annual population growth people stemmed from immigration.[10] This trend was expected to continue throughout the year, however, the impact of the COVID-19 pandemic ultimately led to a sharp decline in immigration and by extension, a decrease in population growth.[11] Most immigrants have tended to settle in Canada’s largest cities, looking for job and education opportunities.[12]

Toronto, Montreal, and Vancouver, the three largest cities in Canada, are commercial and administrative centres. The population increase in these cities depends on the expansion of the government and business sectors. These cities attract most of Canada’s immigrants and generate the majority of the nation’s population growth.[13]

Table 1: Population of Canada’s three large CMAs during the 2011 census and 2016 census.[14]

Benefits of Urbanization

A certain degree of population density is necessary to efficiently share some basic infrastructure and reduce user unit costs, especially for specialized production inputs, such as labour skills. As large urban areas continue to reap the benefits of being located close to other similar businesses, they become agglomeration economies.[15] As agglomeration economies, there are higher incomes and more job opportunities available than would be possible in smaller cities and rural areas.[16] As of 2018, major metropolitan areas in Canada account for 61% of national GDP and 63% of employment. Between 2000 and 2016, urban areas generated 61% of the national GDP growth.[17]

Figure 1: GDP of major metropolitan areas in Canada (in millions CAD)[18]

With 101 accredited universities and many research institutes and think tanks, Canada’s metropolitan areas have grown to become knowledge and innovation centres.[19] This high concentration of people in urban areas generates more opportunities for interaction, promoting creative thinking, knowledge spillovers, and idea generation. As a result, Canada’s large cities have a highly educated workforce, high levels of innovation, and intense productivity, resulting in sustainable economic development.

According to the Solow Growth Model, which measures economic growth by calculating the change of output levels in a given economy over time due to changes in population growth rates, savings, and technological progress, sustained growth and persistently high living standards move concurrently with capital accumulation.[20] This means that economies will experience significant growth as capital accumulation first starts, and this will plateau because innovation elevates productivity in the economy.[21]

As a result of the population hubs that form around agglomeration economies, larger cities can have broader access to education due to the higher demand for and increased ability to provide social services.[22] With many jobs in the public sector and technology, Ottawa was the large urban centre with the highest proportion of adults with a bachelor’s degree or higher (43.5%) in 2016, followed by Toronto (40.9%), Calgary (38.3%), Vancouver (37.5%), and Halifax (35.2%).[23]

Challenges of Urbanization

As previously highlighted, increased movement to metropolitan areas has increased population size and stimulated economic growth and development in many Canadian cities. However, unintended consequences can also stem from this movement.

Large metropolitan areas attract those looking for higher education, opportunities to enhance their careers, or to obtain public services not as readily available outside of larger cities, such as more expansive social housing or public transportation systems. The social disruption caused by continuous population increases can lead to a corresponding surge in demand for services that municipal governments are unable to meet due to their limited revenue sources.[24]

Additionally, urbanization has led to higher rates of income inequality, the gap between the highest and lowest income earners in society. High income inequality has negative impacts, and has been found to lead to increased crime, decreased quality of overall population health, political inequities, and lower educational attainment rates.[25]

Income disparity is measured with the Gini Coefficient, a calculation of income distribution in a given society. Inequality is measured on a scale from 0 to 1, with 0 representing total equality and 1 meaning that a single person earns all of a country’s income.[26] With a Gini coefficient of 0.3, income inequality is not considered significant in Canada.[27] However, rising urban poverty rates and a wider income gap in the Canada’s largest cities have sparked concerns. While agglomeration economies increase educational opportunities, improve social mobility, and economic growth, these opportunities are not made readily available to all, and that in the absence of the social capital required to gain such opportunities, quality of life may instead decrease.[28]

As the urbanization rate increases, there is also a need for more housing, social programs, and commercial business spaces. However, the limited land available for development in city centres, has led to urban sprawl beyond city limits and into environmentally protected areas and agricultural lands.[29] Additionally, as land in cities becomes scarcer, housing affordability in cities is reduced.

The OECD considers “housing affordability” and housing condition” to be key dimensions of well-being.[30] Housing affordability is considered a measure of well-being because affordable housing is essential for people to meet their basic shelter and security needs.[31] As housing condition covers many areas, including noise levels, mould, sanitation, indoor temperature, humidity, and home safety, the cumulative impact of someone’s housing condition their mental and physical health is sizeable.[32]

The affordability of a city is measured, in part, by the affordability of its housing. The Canada Mortgage and Housing Corporation (CMCH) states that housing is affordable when a household spends less than 30% of its pre-tax income on adequate shelter.[33] CMCH developed standards of adequacy (the housing does not require significant repairs) and suitability (the housing is sufficient in size and space), in addition to affordability, to evaluate a household’s situation.[34] In 2018, the percentage of household income required to cover ownership costs was 75% in Toronto, 87% in Vancouver, and 45% in Montreal. Comparatively, the percentage of household income required to cover ownership costs in other large cities such as Edmonton (28%), Saskatoon (34%), Regina (30%), Winnipeg (31%), Quebec City (34%) and Halifax (33%) was more affordable.[35] However, currently even the smaller markets across Canada are starting to lose their historic affordability.[36]

Negative impacts on the environment are also a consequence of an expanding urban population and increased urban sprawl. In Canada, approximately 12% of the population live in areas where fine particulate matter levels exceeded 24-hour national air quality standard levels.[37] However, Canada’s largest cities have slightly lower levels of fine particulate matter in the air compared to other OECD countries (see table 3). This is because air pollution has been decreasing in Canadian cities since 2000, including in cities with mining, oil, and industrial activities, such as Saskatoon and Edmonton, where pollution levels have been historically higher.

Table 3: Air Pollution in PM2.5 – comparison between largest cities in USA and Canada. [38]

Finally, urban growth leads to demands on government service delivery and enhanced governance because of the complexity inherent in managing a large population.[39] The expansion of city land results in phenomena known as conurbation, the joining of cities and neighbouring suburbs, creating a need to coordinate service delivery between governments of adjacent urban areas.[40] This is especially relevant in Canada as most Canadians live in a metropolitan area, and these areas are continuing to grow exponentially.

Conclusion

Canada is an urban country whose cities have fast become agglomeration economies, acting as agents of social, cultural, economic, technological, and political adaptations and progress. With the rapid growth in Canada’s urban populations, urbanization has become a key discussion point, due to the impacts of urban density on economic growth and individual quality of life. While large metropolitan areas provide opportunities for increased earning potential and employment, accounting for a substantial part of the GDP growth, these large population centres pose governance challenges for public administrators and have higher rates of income inequality, environmental impacts, and a lack of affordable housing.