The Connection of Urbanization with Growth

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Paul Romer has a nice post up about how urbanization “passes the Pritchett test” for development. Pritchett’s test is that urbanization (in this case) is related both in the cross-section and the time-series to living standards, and positive shocks to urbanization are associated with higher living standards. So Romer argues that we should be studying urbanization as a route towards higher living standards in developing countries. This jives to some degree with his charter city concept, which proposes establishing new cities with functioning institutions in developing areas. There isn’t really anything to argue with about the rough correlations in the data. Urbanization is, and has been, associated with higher living standards for a long time.

But there are some subtleties in those relationships that mean simply urging everyone to flood into cities is not necessarily wise. Everything I’m going to talk about now is based on joint work of mine with Remi Jedwab, who studies urbanization in developing countries very deeply.

The first caveat I’ll point out is that the absolute pace of urbanization matters a lot. Moving an extra 10,000 people into a city in a year may improve productivity in that city and overall in the country. Moving 1,000,000 people into the same city in a year will probably generate such awful congestion costs that productivity in that city falls and country-level productivity may be lower. Remi and I lay out a simple model of this in a working paper that we have out (and which is being furiously revised right now). We show that if the absolute growth of city population is too large, then city wages will actually get pushed down due to the overwhelming congestion effects, even if there is some exogenous technological progress. That part isn’t incredibly shocking. What we then do is show that if population growth is endogenous, and rises as wages get lower, then too-rapid city population growth pushes a city into what we call a poor mega-city equilibrium. The city gets stuck with low wages and high population growth, and cannot overcome the congestion costs of that growth. We explain the arrival of poor mega-cities like Dhaka, Lagos, and Karachi as a kind of perverse result of the mortality transition after World War II, as it raised the absolute growth of cities beyond a critical threshold. Cities like these grow by 400,000 or 500,000 residents per year, while historically cities like New York or London only grew – at their peak – by maybe 200,000 per year. Urbanization that happens too rapidly can have counter-productive results.

The second caveat is that what drives urbanization matters. Remi and I, along with Doug Gollin, have a paper on urbanization and natural resources. If you look across countries, as Romer does, then there is a clear relationship of GDP per capita and urbanization rates. However, urbanization rates are not necessarily correlated with industry or tradable service production.
Urbanization and Industrialization

The figure above shows the lack of a firm relationship, and this shows up if you use just manufacturing, just manufacturing and finance, or some other reasonable definition of what constitutes tradable goods and services. There are lots of countries in the world that have high urbanization rates, but are not industrialized, and they tend to be resource exporters. And this isn’t just places like Dubai. Angola – a major oil exporter – has an urbanization rate equal to China’s. We document that natural resource exports are a significant driver of urbanization. We even have a neat little diff-in-diff type specification that looks at discoveries of resources and shows that urbanization rates jump in the decade after the discovery. Perhaps more important, though, we show that cities in places that urbanize because of natural resource booms have very different urban workforces than typical “industrial” urbanizers. Cities in places like Angola have a big percentage of their urban workforce in personal services and small-scale retail trade, and few people in industry or high-value services. This contrasts with China, where their urban workforce has a huge percentage of people in sectors that produce tradable goods or services (i.e. finance). The point is that urbanization is not homogenous. What drives urbanization matters, in that it determines what sectors people in those urban areas end up working in.

The last caveat kind of takes off from the second. Urbanization has been related to higher living standards over much of history, but that doesn’t mean it always will be. Remi and I did a survey paper on the relationship of urbanization and GDP per capita over time. Yes, they are positively related in every year we look at, going back to 1500. But that doesn’t mean that urbanization rates have increased primarily because countries have gotten richer.

Urbanization and GDP per Capita Over Time

What we see in the data is that urbanization rates have shifted higher at every level of GDP per capita over time. A country with GDP per capita of $1,000 had an urbanization rate of about 10-15% in 1500, but by 2010 a country with the same GDP per capita would be between 35-50%. Most urbanization over history has occurred not because of countries getting richer, but simply because urbanization has gone up everywhere. One implication is that the positive relationship of urbanization and living standards can only go down in the future. Rich countries are maxed at at urbanization rates of 100%. So if poorer countries continue to urbanize, then the relationship of GDP per capita and urbanization has to fall.

The over-arching point is that the positive relationship between urbanization and living standards we see in existing data is an equilibrium relationship, not necessarily a causal one. There are plausibly negative impacts of too-rapid urbanization on living standards. And Romer is careful in his post not to make any kind of strong causal claim. He thinks we should be studying urbanization more carefully to try and understand what exactly it is that generates the positive relationships. I’d strongly agree with that. I’d like to think that Remi and Doug and I have given some clues towards an answer, perhaps just by pointing out things that are not responsible for the positive relationship.

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11 thoughts on “The Connection of Urbanization with Growth

  1. “A country with GDP per capita of $1,000 had an urbanization rate of about 10-15% in 1500, but by 2010 a country with the same GDP per capita would be between 35-50%.”
    -That definitely sounds counterintuitive, but is sorta plausible. Late 18th century Argentina and the U.S., for example, were fairly rich countries by modern Sub-Saharan African standards while being largely rural.
    “Most urbanization over history has occurred not because of countries getting richer, but simply because urbanization has gone up everywhere.”
    -Mauritania is a fine example of this.
    “One implication is that the positive relationship of urbanization and living standards can only go down in the future. Rich countries are maxed at at urbanization rates of 100%. So if poorer countries continue to urbanize, then the relationship of GDP per capita and urbanization has to fall.”
    -Very, very good point.

    • Actually, due to the stronger increase in capita than GDP per capita in many countries, and as urbanization is at least partially dependent on population density, that conclusion does make sense.
      Also, are there any good population density v. urbanization scatter plots?

      • Good question on the plots. Will check it out. If not, I can probably make one without too much trouble. The data all lives on my computer somewhere.

  2. Maybe the way to look at this is to ask the question if it strong growth that attracts residence from the rural area or is it extreme poverty in the rural areas that pushes people off the land. for example, British urbanization was due in part to the inclosures that forced people off the lands.

    In Mexico right now, is it NAFTA placing downward pressures on grain prices forcing rural population off the land to urban centers or to the US rather than opportunities in the cities drawing new population in ?

    • Right, and I think that holds more generally. What drives urbanization is important. Pulling people in because of better opportunities is probably good. Pushing people in because of lack of opportunity elsewhere is probably bad (because there is an externality on crowding the city).

  3. Romer does regularly stress that it’s not just urbanization, but relatively good urbanization, thus his big effort with charter cities.

    But back to robots, and AIs, which will have a huge effect on all of this, a profound thing coming, and in the process right now, is the decimation of manufacturing employment globally. Robot vision, dexterity, and overall perception and movement are falling fast, thus the re-shoring and dropping Chinese manufacturing employment.

    You’ve said how humans have creativity that horses didn’t, and this will somehow protect them, but when robots can perceive and maneuver and manipulate as well, or better, and faster, than humans, at a fraction of a subsistence wage, it’s hard to think of what else an unskilled human can do that will have more than a fraction of a subsistence market wage.

    This video from the recent Milken conference features top machine learning expert Jeremy Howard. Please look at minutes 22-30:

    http://economistsview.typepad.com/economistsview/2015/04/video-technology-and-jobs-should-workers-worry.html

    Howard recommends a new book by robotics expert Martin Ford, “Rise of the Robots”, which I’m reading. I strongly recommend looking at the intro and pages 1-12 on current advances in manufacturing automation, and robot perception, movement, and dexterity.

    • Richard – will check it out for sure. I’ll just reiterate here my point about subsistence wages. They are endogenous. If robots lower wages because they are very productive, then they are also lowering the prices of many goods and/or services. So the subsistence wage (in dollars) may well fall. It isn’t *necessarily* true that robots/AI, no matter how clever, will render much of the workforce unable to support themselves. It *could* happen.

      • It *could*, yes, so it depends on the specifics as to whether it will, thus the reading on the specifics of AI and robotics. For horses, unfortunately, the specifics weren’t so good. Endogeneity did lower the real prices of their feed and stables, but not nearly as much as it lowered their real market wage, and so their real market wage still dropped below subsistence for 99.99% of them.

        The Ford book is quite amazing. Up to page 70. I walk into a grocery store now and it’s sad. 90% of these employees are probably losing their jobs in the next 5-20 years. The shelves will be stocked by dexterous robots with amazing machine vision, all hooked to a central computer so they share the big data learning from every other stocking robot in the world. Shoppers will pull their carts up to robotic conveyers, which will, with great speed take off the items as they’re identified by machine eyes. The robot checkout will then say in a very pleasant voice, that will by $127.93 Mr. Jones, who it will recognize by face. Mr. Jones will say put on my Visa, and he’ll be off. No need to sign, there’s a video recording of the transaction, kept on a super cheap per byte hard drive, and later magnetic tape.

        So, it’s not just fast food, by any stretch. As I’ve said, it will be hard to think of anything a low skilled worker will be able to do at a market wage above minimum, or subsistence, that will employ the hundred million of them in the US, and billions worldwide.

        It’s going to take a tremendous investment in education, and the right education – and Heckman-style early development. In the past, if technological advance made it so you needed less humans to assist an average machine, you just built more machines, and kept total employment up, and grew the pie. But the big bottleneck now is that, especially with the coming machines, you need highly skilled humans too to keep adding machines until you have enough so that you can employ so many unskilled people. Because the number of unskilled people these machines each will need to produce anything marketable is going to become vanishingly small (I think I have a nice guest post on this at Carola Binders: http://carolabinder.blogspot.com/2014/03/guess-post-second-machine-age-book.html ).

        Eventually there will be little even a highly educated and smart human can do that these computers can’t, but that’s further out, and the endgame. It may be 30 years or more before we hit that, even with what I’ve been hearing. At that point, you just have to redistribute, and all the Koch brother propaganda money in the world won’t be able to stop it, at least not if we still have a democracy. The reality will just be too obvious, no matter how ubiquitous and slick the propaganda is. But before we get to that endgame I think a profound increase in education and Heckman-early development effort can really help, and increase the pie, and in of itself it will create a lot of jobs.

  4. Perhaps missing in the charter city idea is that agricultural and industrial development, say mining, was first successful and then made cities successful. I don’t see urbanisation as successful if the basics aren’t successful first. Raw materials have to come from somewhere. But concentration of markets causes urbanisation.
    Many developing countries are already highly urbanised and increasingly so. It is impossible for me to say if that means that that there has been an increase in wealth or too many people chasing too few jobs in an urban area. Shanty towns and slums abound in the third world urban areas.
    Professor Sachs spoke of villages and I don’t know if it can be compared to the urban area idea.

  5. Pingback: Agriculture, Cities, and the Future of Poverty | Against Jebel al-Lawz

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