Do Cities Matter?

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ImageIt is a paradox that India which is among the most densely populated countries in the world, is also among the least urbanized. The figure below compares urbanization rates with income for more than 100 countries. It shows that an increase in urbanization rate is positively associated with real per capita income. This is the iron law of development—i.e., growth is associated with the reallocation of labor and capital away from traditional (rural) sectors to modern (urban) sectors. Spatial transformations that give rise to urbanization accelerate growth because households and firms benefit from scale economies, mobility, and specialization. Increased urbanization contributes to growth, job creation and poverty reduction. This can indeed become a virtuous circle.

The paradox of India is that despite rapid economic growth, the urbanization rate remains low at less than 30 percent, compared to 40 percent in China. What explains this slow pace of urbanization? Is it geography, institutions, or peculiar growth patterns? Different factors affect the pace of spatial transformations differently. Countries that provide strong incentives for towns to be re-classified as urban may be characterized by urbanization above the predicted level (e.g. Bangladesh). Geographically isolated and mountainous lagging regions are likely to have a lower level of urbanization than what would be predicted solely based on level of per capita income (Nepal).

Figure: India and other South Asian countries have much lower urbanization, 2005


Some industries and services are more prone to clustering than others, thus contributing more to urbanization than industries and services which benefit relatively less from agglomeration economies. Services cluster more in larger cities, and manufacturing into smaller cities or newer towns. In India, more people live in the largest cities than in small towns compared to China. Nearly 6 percent of the urban population lives in the largest cities in India, which is double in comparison to China. This is explained by a bigger and more dynamic service sector in India. Service industries, which are less land intensive and more skill intensive, appear to agglomerate more in large cities like Bangalore. Manufacturing (more land intensive and less skill intensive) seems to thrive more in smaller towns. China has many smaller cities than India, as it has a bigger manufacturing sector compared to India. So “growth patterns” have a big impact on the pace and content of urbanization.

ImageLand market, property rights, and contractual institutions also matter. They can restrain mobility and prevent households and firms from moving into cities. This can slow down the pace of industrialization. Indeed, rural to urban migration rates are much lower in India (3 million every year) compared to China (7 million). Despite these distortions, and thanks to a dynamic service sector, large cosmopolitan cities like Bangalore and Hyderabad have managed to thrive.

Internal conflict and violence can also accelerate or retard urbanization. When conflicts are predominantly in rural areas, rural-to-urban migration rates accelerate. Internal conflict can lead to distressed urbanization (i.e. urbanization without growth). The prolonged nature of civil unrest in countries such as Cambodia, Myanmar, and the Philippines seems to have contributed to this. Where conflicts are urban, they tend to experience under-urbanization, as conflicts deter private investments. Poor infrastructure in urban areas can also deter migration and urbanization.

So this brings us to challenges facing Indian urbanization. Can “new economic geography” be distilled into development of cities? How important are economies of scale, factor market distortions, and the role of mayors, in urbanization? Or are spatial dimensions of development impacted more by social and environmental factors? Are crime, violence, and squalor “externalities” of urbanization or an integral part of development? Can we “reshape economic geography” of cities?


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