Does Urbanization Still Drive Economic Growth in the Era of Smart Cities and Climate Challenges?

Abstract

Urbanization has long been viewed as a driver of economic growth through agglomeration economies. However, emerging challenges such as digital transformation and climate change call into question the universality of this relationship. A major gap in the literature is the limited integration of digital and environmental factors in explaining nonlinear urbanization–growth effects, as previous reviews (e.g., Gilles Duranton and Diego Puga, 2023) focus mainly on traditional mechanisms. This review therefore examines the evolution of the urbanization–growth nexus, identifies critical thresholds, evaluates the roles of digitalization and climate factors, and proposes a new conceptual framework. Following the PRISMA 2020 guidelines, searches were conducted in Web of Science, Scopus, EconLit, RePEc/IDEAS, and Google Scholar using Boolean search strings. From 3,892 records, 186 peer-reviewed studies published between 1960 and 2024 were selected. These studies linked urbanization indicators (e.g., population density and city size) to growth outcomes (e.g., GDP and productivity), while accounting for digital or environmental moderators. The findings reveal three distinct phases. Between 1960 and 2000, urbanization showed strong positive effects on growth. From 2000 to 2015, growth effects remained broadly linear during the period of rapid urbanization in China, India, and parts of Southeast Asia. After 2015, however, the relationship became increasingly conditional, with average agglomeration elasticities declining from 0.05 to 0.03. Digital infrastructure was found to increase urbanization benefits by 8–15 %, whereas environmental degradation reduced them by 4–12 %. Building on these findings, the review proposes a novel multiplicative framework in which net agglomeration benefits depend on physical density, amplified by digital (D) and environmental (E) multipliers. This framework helps explain why mid-sized smart and sustainable cities often outperform megacities in generating economic gains. Overall, the review confirms that urbanization can continue to support economic growth, but primarily in cities that are both digitally advanced and environmentally sustainable. Key limitations include geographic biases in the existing literature. Future research should therefore focus on identifying the causal effects of 5G and net-zero initiatives through experimental methods and harmonized measurement indices.