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Fridays Academy: Urbanization and Growth

Ignacio Hernandez's picture

From Raj Nallari and Indira Iyer's lecture notes.

 

Urbanization and Growth

The world urban population is expected to nearly double by 2050, increasing from 3.3 billion in 2007 to 6.4 billion in 2050. By mid-century the world urban population will likely be the same size as the world’s total population in 2004. Virtually all of the world’s population growth will be absorbed by the urban areas of the less developed regions, whose population is projected to increase from 2.4 billion in 2007 to 5.3 billion in 2050. The urban population of the more developed regions is projected to increase modestly, from 0.9 billion in 2007 to 1.1 billion in 2050.

The urban growth rate of less developed regions reached a high at 3.0 per cent per year in 1995-2000 compared to 0.5 per cent in more developed regions. The urban growth rate is estimated to be particularly rapid in the urban areas of less developed regions, averaging 2.4 per cent per year during 2000-2030.

Part of the economic growth associated with urbanization can be explained by productivity gains. Quigley (2008) explains these productivity gains as arising from specialization; from lower transactions costs and complementarities in production; from education, knowledge, and mimicking; and simply by greater proximity to large numbers of other economic actors. Productivity gains translate to higher per capita incomes. Bloom and Khanna (2007) find a positive cross-country association between income and urbanization, as shown in the figure below which plots country-level data on real GDP per capita and the share of the population living in urban areas during 1960 and 2004. The fact that the curves are initially very flat is consistent with the view that the links between urbanization and income are relatively weak at low levels of development. In a study on urbanization in the East Asia region, the elasticity of economic growth to urbanization rate was estimated at 2.71. This implies that a 1% increase in the urbanization rate raises the gross domestic product (GDP) per capita by 2.71%. This is the reason why often urbanization is said to be an engine for growth.

 

Urbanization and Economic Growth

Real GDP per capita, constant 2000 dollars

                                                                                                     Share of Urban Population, percent

 Source: Bloom, David and Tarun Khanna.2007

 

However, this may not be true for all countries. While urbanization in Asia has been accompanied by rapid economic growth over the past 45 years, in Africa, where urbanization has occurred to a nearly identical extent, economic growth has been sluggish. This comparison does not rule out a link between urbanization and economic growth- incomes in Africa may have grown even more slowly without urbanization, for example- but it does suggest that factors other than urbanization are more important determinants of income growth.