Governing the data-driven city: between innovation and inclusion

By Dr Beatriz Calzada Olvera, IHS Specialist in Economics and Innovation, and Dr Paula Nagler, IHS Economic Researcher

The rise of the data-driven city

Cities have always changed with innovations. Steam engines powered factories, electric light lit streets and workplaces, and assembly lines transformed how urban residents worked. These changes increased productivity and reshaped urban economies, shifting from agriculture to industry, and later to services.

Today, digital technologies–such as artificial intelligence (AI), online platforms, and big data–are transforming cities again. How goods and services are produced, managed, and delivered now depends heavily on data and platforms. Yet, like earlier innovations, digitalisation risks leaving some people behind.

‘Servification’ of the urban economy

Economic growth has long followed structural change: workers shifted from rural farms to urban factories and then into services. This is why structural change and urbanisation developed hand in hand. In richer economies, the most urbanised countries, most people now work in services–and the trend continues. But ‘servification’ is not just about more service jobs–it reflects how digital technologies are deeply embedded in logistics, education, and health.

This transition has not been smooth. Automation and robotics have replaced many routine tasks and hollowed out middle-income jobs, creating a polarised labour market: low-paid, unstable gig work on one side, and high-skilled tech jobs on the other. AI can also compress wages for medium- and high-skill workers, weakening traditional advantages. In less developed economies, digital technologies may bring few new jobs; in advanced economies, it can squeeze wages and job security.

Digitalisation is also creating new opportunities. Platforms are a clear example: artisans selling handmade goods on Etsy, homeowners renting out their space on Airbnb, or drivers offering services through Uber. These models allow people to turn skills, assets, or spare time into income with low entry costs. The now-famous Dubai bar–a small-scale invention–became world famous overnight thanks to TikTok influencers, showing how digital visibility has redefined what ‘scale’ and ‘market access’ mean.

Data and unequal opportunities

But opportunities are not equally distributed. Data–the raw material of the digital economy–is unevenly accessible. Sellers on platforms like Amazon or Alibaba need significant investment and skills to understand algorithms and rank high in search results. Apps like Uber and Deliveroo make work flexible and easy to enter, but also more precarious, shifting risks to workers that were traditionally borne by companies, such as sick leave.

To address these downsides, many governments, especially in Europe, have started to step in. Spain’s Rider Law reclassified gig workers as employees, and Dutch courts have challenged false self-employment. Private initiatives such as France’s Mobicoop or the US-based inDrive experiment with cooperative ownership and fairer pricing models.

Digital governance

Governance is walking a tightrope. Too little regulation allows concentration, inequality, and labour exploitation; too much can stifle innovation. The EU is a good example: it leads in setting ethical AI standards and digital rights, but lags behind the US and China in AI development.

Evidence suggests that digitalisation boosts productivity, especially in cities. It enables greater efficiency, cleaner production, and closer integration into global value chains. Urban areas, with their concentration of talent and digital infrastructure, are well positioned to capture these gains. But digitalisation will not realise its full potential without smart policies. Striking the right balance–protecting workers without slowing innovation–is the key governance challenge of our time.

Outlook: Building Inclusive Cities

AI and digitalisation are not just adding new technologies to cities – they are transforming the way they work. Economic development paths are shifting towards ‘servification’, ‘platformisation’, and data-driven production. These changes reshape labour markets, put pressure on existing policy frameworks, while unlocking new forms of productivity. Yet the benefits do not reach everyone equally. Without targeted policies and nuanced regulation, digitalisation risks reinforcing rather than reducing inequalities.

The task ahead is not to embrace or reject innovation, but to shape it with a wise set of rules, ensuring that urban economies remain both innovative and inclusive. In a world increasingly driven by data and complex algorithms, that is easier said than done.

Photo: Zoshua Colah on Unsplash