Developing countries need a better strategy to accelerate rural development

Despite the advances of the modern era, the global economy remains strikingly lopsided when it comes to the welfare of rural areas. Consider just two statistics:

• 80% of the world's poorest people live in rural areas, primarily in the poorest countries.
• 80% of global GDP is produced in cities, mainly in the richest countries.

This disparity highlights the urgent need to address the unfulfilled promises of rural growth and urbanization in developing countries. So far, efforts to promote agricultural growth have focused on investment in basic infrastructure—irrigation systems, rural roads, farm equipment, and agricultural extension services.

Such efforts are crucial—but insufficient. As countries develop, simply increasing capital stock yields diminishing returns. A shift in strategy to improve economic efficiency is necessary. The World Bank’s latest World Development Report  outlines how economies at all stages of development promote growth and unlock productivity gains. The 3i approach it proposes applies to rural areas as well:

1. Investment (1i): Focus on basic rural infrastructure and services, such as roads, irrigation systems, and agricultural extension services.
2. Infusion (2i): Introduce and adapt technologies to boost agricultural productivity. This includes solar water pumping, greenhouses, improved seed varieties and farming techniques, and enhanced post-harvest processing and storage methods. Link local agricultural research institutes to globally renowned research centers.
3. Innovation (3i): Develop new, locally tailored solutions for rural challenges—such as climate-resilient crop varieties or innovative rural business models.

Rural communities in developing economies brim with untapped potential. More sophisticated growth strategies will unleash this. Evidence shows that total factor productivity—a combination of infusion and innovation—strengthens the agriculture sector. Technology adoption offers far greater gains than simply reallocating land and labor. 

Let’s look at the evidence. In five countries—India, Nigeria, the Democratic Republic of Congo, Ethiopia, and Bangladesh, home to half the world's extreme poor—crop yields have barely doubled. Yet, in several countries in South and East Asia, where technology adoption is higher, yields have increased three- to six-fold. My colleague, Bill Maloney, and his coauthors find that despite high returns of around 40 percent to investment in productivity-improving technologies,  adoption remains slow, and investment in research and development is chronically low. In the first decade of this millennium, for example, many countries in Africa had zero or negative annual growth in agricultural research spending. Bridging the research spending gap and addressing information and credit barriers in the poorest nations is essential.

Farm size isn't the issue. What really hinders progress is the misallocation of resources and market failures, such as limited access to credit and information. For example, Asia’s small, 1-hectare farms have achieved productivity gains nearly as high as Europe's 10-hectare farms and North America/Oceania's 100-plus-hectare farms. It's not just about yields — it's about improving food quality and transitioning to higher-value products.

The Unfulfilled Promise of Agglomeration Economies

Rural productivity growth is meaningless if it pushes people into stagnant urban areas. Cities in low- and middle-income countries have grown rapidly but aren't delivering expected benefits, especially in parts of Africa and South Asia. Instead, people move to cities driven by rural "push" factors rather than urban "pull." In our work with Bill Maloney and Arti Grover, we find that urbanization in developing countries often results in “sterile agglomerations,” where the move to cities fails to drive structural transformation, as in Africa.

Cities should be thriving centers of social, economic, and political potential, where agglomeration economies lead to higher labor productivity and global market competitiveness. However, opportunities for social mobility through education, skills, and employment are often absent in these areas. Poorly designed and enforced regulations in land and financial markets prevent productive businesses from expanding while protecting unproductive ones. Congestion also keeps people from benefiting from the urban dividend.

Developing economies must balance the forces of creation, preservation, and destruction, outlined in the latest World Development Report. Large corporations, state-owned enterprises, and powerful citizens can advance change or prevent growth. Introducing mechanisms that encourage competition, and the rise of new players is crucial. Rural areas should accumulate and allocate local talent more efficiently.

In countries where state-owned enterprises dominate and market entry barriers are high, unlocking economic potential depends on lowering those barriers. This matters equally in agricultural and urban land markets.  Improving contestability means creating conditions where the threat of competition keeps incumbents on their toes. Even imperfectly contestable markets are preferable to heavy-handed state intervention. To boost urban productivity, governments should craft regulations that lower the cost of land, housing, and other non-tradables, allowing tradable sectors to flourish.

A Policy and Regulatory Agenda

With 80 percent of the world’s poorest living in rural areas, policymakers must look both at vibrant villages and dynamic urban centers for the seeds of growth. A strong rural growth strategy extends from farms to firms and families, promoting structural transformation and economy-wide growth.

"Harvesting prosperity" means supporting firms and farms of all sizes, removing barriers to entry for productive businesses, and using crises as opportunities for renewal. This requires a policy and regulatory agenda focused on fluid factor markets, vibrant product markets, and dynamic information flows—not just more investment.

Development institutions have a vital role to play in supporting governments in implementing these changes. By tackling these interconnected challenges, we can pave the way for a more prosperous rural and urban landscape in developing countries.