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Growing through cities in developing countries
Abstract
This paper examines the effects of urbanisation on development and growth. It starts with a labour market perspective and emphasises the importance of agglomeration economies, both static and dynamic. It then argues that more productive jobs in cities do not come in a void and underscores the importance of job and firm dynamics. In turn, these dynamics are shaped by the broader characteristics of urban systems. A number of conclusions are drawn. First, agglomeration effects are quantitatively important and pervasive. Second, the productive advantage of large cities is constantly eroded and needs to be sustained by new job creations and innovations. Third, this process of creative destruction in cities, which is fundamental for aggregate growth, is determined in part by the characteristics of urban systems and broader institutional features. We highlight important differences between developing countries and more advanced economies. A major challenge for developing countries is to make sure their urban systems acts as drivers of economic growth.
Introduction
Urbanisation and development are tightly linked. The strong positive correlation between the rate of urbanisation of a country and its per capita income has been repeatedly documented. See for instance World Bank (2009), Henderson (2010), or Henderson (2002) among many others. There is no doubt that much of the causation goes from economic growth to increased urbanisation. As countries grow, they undergo structural change and labour is reallocated from rural agriculture to urban manufacturing and services (Michaels, Rauch, and Redding, 2012). The traditional policy focus is then to make sure that this reallocation occurs at the ‘right time’ and that the distribution of population across cities is ‘balanced’. Urbanisation without industrialisation (Fay and Opal, 1999, Gollin, Jedwab, and Vollrath, 2013, Jedwab, 2013) and increased population concentrations in primate cities (Duranton, 2008) are often viewed as serious urban and development problems.