Cities and Growth in Developing Countries - World...

Cities and Growth

in Developing Countries

Gilles DurantonUniversity of Toronto

March 2007

Starting point

• How seriously should we take the "from cities to growth"connection?

• Does a growth agenda alter urban policyrecommendations?

• The urban landscape is a (political-) equilibrium outcome

2

Output

An integrated framework to think about cities in developingcountries

• Highly tractable and flexible

• Can be used to make sense of the empirical evidence

• Highlights key policy tradeoffs

• Can be used as a basis for ‘urban diagnostics’

3

A simple graphical framework to think about urbandevelopment

Graphical modelling inspired by Combes, Duranton, andOverman (2005):The 3.5-curve approach to urban economics

• A wage curve

• A cost of living curve

• A net wage curve

• A labour supply curve

Think about rich countries for the time being

4

CH

BH

CC Hw −

BB Hw −

Bw

BN

N

Net Wage Curve

N

( )NH

C

B

A

CN

Cw

( )Nw

Wage Curve

Cost of Living Curve

( ) ( )NHNw −

Labour Supply Curve

)(a

)(b

)(c

Figure 1

5

Two important asides

• Natural tendency towards ‘specialisation’

• General equilibrium effects

6

Main policy issues in the 3.5-curve framework

Main inefficiencies

• Local externalities in production

• ‘Urban’ inefficiencies affecting the cost-of-living curve

• Migration inefficiencies

• Inefficiencies associated with the development of newcities

7

A

C

N

Net Wage Curve

N

( )NH

B

( )Nw

Wage Curve

Cost of Living Curve

( ) ( )NHNw −

Labour Supply Curve

)(a

)(b

)(c

Figure 2a

8

D

E

F

C

N

Net Wage Curve

N

( )NH

B

A

( )Nw

Wage Curve

Cost of Living Curve

( ) ( )NHNw −

Labour Supply Curve

)(a

)(b

)(c

Figure 2b

9

E

F

N

Net Wage Curve

N

( )NH

G

( )Nw

Wage Curve

Cost of Living Curve

( ) ( )NHNw −

Labour Supply Curve

)(a

)(b

)(c

Figure 2c

10

E

F C

N

Net Wage Curve

N

( )NH

G

( )Nw

Wage Curve

Cost of Living Curve

( ) ( )NHNw −

Labour Supply Curve

)(a

)(b

)(c

Figure 2d

11

Key issues:

• Some inefficiencies are ‘easy’ to fix, some rather hard,some extremely hard

• ‘Local’ second-best (key interdependencies)

12

What’s special about cities in developing countries?

The benchmark is consistent with urban features indeveloping countries:

• Agglomeration effects (Henderson, 1988; Henderson,Lee, and Lee, 2001; Lall, Koo, and Chakravorty, 2003;Lall, Shalizi, and Deichmann, 2004b; Deichmann, Kaiser,Lall, and Shalizi, 2005; Overman and Venables, 2005; daMata, Deichmann, Henderson, Lall, and Wang, 2007)

• Cost of living (Thomas, 1980; Richardson, 1987;Henderson, 2002a; Timmins, 2006)

• Bell-shaped net benefits (Au and Henderson, 2006a,b)

• Migration (Brueckner, 1990; Ravallion and Wodon, 1999;Lall, Selod, and Shalizi, 2006)

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But key features are missing

• Primate city favouritism

• Market access

• Dual labour markets

• Migration

• Dual housing markets (to be done)

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Primate city favouritism

Driven by politics

• Local rents? (Ades and Glaeser, 1995; Davis andHenderson, 2003)

• Endogenous (internal) market access? (Saiz, 2006)

• Trade? (Moomaw and Shatter, 1996; Krugman and LivasElizondo, 1996; Nitsch, 2006)

• Other channels? (Henderson, 2002b)

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=− AA Hw

BB Hw −

BH

Bw

AH

Aw

N

Net Wage Curve

N

( )NH

B A

( )Nw Wage Curve

(favoured city)

Cost of Living Curve

( ) ( )NHNw −

Labour Supply Curve

)(a

)(b

)(c

Figure 3

Wage Curve (non-favoured city)

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Internal market access

As highlighted by the new economic geography (Fujita,Krugman, and Venables, 1999)

• Empirical work so far: general negative effect of pooraccess (Lall et al., 2003, 2004b; Lall, Funderburg, andYepes, 2004a; Deichmann et al., 2005)

• Theory highlights non-linear effects (Head and Mayer,2004; da Mata et al., 2007)

• Should also affect the cost of living (Timmins, 2006)

17

CN

Cw

Aw

CH

AH

=− AA Hw

CC Hw −

AN

N

Net Wage Curve

N

( )NH

C

B

A

( )Nw

Wage Curve

Cost of Living Curve

( ) ( )NHNw −

Labour Supply Curve

)(a

)(b

)(c

Figure 4

18

Migration and dual labour markets

Inefficient migration in the traditional approach (Harris andTodaro, 1970)

19

Bw

BB Hw −

AA Hw −

BH

Aw

AH

w

N

Net Wage Curve

N

( )NH

B

A

( )Nw Wage Curve

(formal sector)

Cost of Living Curve

( ) ( )NHNw −

Labour Supply Curve

)(a

)(b

)(c

Figure 5

Expected wage

Wage Curve (informal sector)

20

Alternative approaches to migrations

F

E

D

C

N

Net Wage Curve (Harris Todaro)

B

A

( ) ( )NHNw −

Labour Supply Curve (free mobility)

Figure 6

Net Wage Curve (standard)

Labour Supply Curve (costly mobility)

Labour Supply Curve (no mobility)

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Does all this matter for growth?

Henderson (2003):

• No effect of urbanisation on growth

• But very large negative effects of excessive primacy

How much should we trust these estimates?

22

Explaining large effects of primacy I: static surpluses?

• Like all growth models, city-growth models have twoequations: production and accumulation (Duranton andPuga, 2004)

• Static externalities in production without action onaccumulation equation might have large growth effects(through subsistence effect)

• Empirically not very credible

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Explaining large effects of primacy II: growthconstrained by cities?

The urban system as the spatial imprint of growth:

• Innovation cities vs. production cities (Duranton andPuga, 2001)

• Business centres vs. production centres (Duranton andPuga, 2005)

Constraining the urban system may reduce growth

Empirically minor?

• Evidence of some urban differentiation (da Mata,Deichmann, Henderson, Lall, and Wang, 2005;Henderson, 2002b, 2005)

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Explaining large effects of primacy III: Dynamicexternalities

• Cities as engine of growth (Lucas, 1988; Eaton andEckstein, 1997; Black and Henderson, 1999)

• Diffusion across cities through workers movements?

• Consistent with large regional disparities

• How important are (dynamic) human capitalexternalities?

– Large literature but still open question

– Dynamic externalities taken seriously inmacroeconomics (Klenow and Rodríguez-Clare, 2005)

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What about policy?

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Static vs. dynamic efficiency

Traditional urban policies: static in nature

• Housing

• Traffic congestion / public transport

• Delivery public services

• Access / Infrastructure

• Reduction in primacy

• Etc

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What could foster dynamic efficiency?

• An end to primate city favouritism?

• Many different forms of ‘mobility’?

• Access?

• Many other policy areas whose forgotten urban/spatialdimension is often forgotten?

28

Drivers of growth vs. constraints and bottlenecks

• Fostering all ‘growth drivers’ may be counter-productive

• The 3.5-curve approach can help identify the constraintsto harmonious urban development

• The diagnostic will differ across countries

• Difficulty: static constraints are easier to identify thandynamic ones

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Priorities vs. ‘second-best’

• Politics and other feasibility constraints require priorities

• But hard to achieve results in a second-best world

30

National vs. local ‘cities and growth’ policies

• Strong general case in favour of decentralisation

• But one city alone cannot do much

• Asymmetry: primate city vs. others

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References

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Au, Chun-Chung and J. Vernon Henderson. 2006a. How migrationrestrictions limit agglomeration and productivity in China. Journal ofDevelopment Economics 80(2):350–388.

Au, Chun-Chung and J. Vernon Henderson. 2006b. Are Chinese citiestoo small? Review of Economic Studies 73(3):549–576.

Black, Duncan and J. Vernon Henderson. 1999. A theory of urbangrowth. Journal of Political Economy 107(2):252–284.

Brueckner, Jan K. 1990. Analyzing Third World urbanization: A modelwith empirical evidence. Economic Development and Cultural Change38(3):587–610.

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Combes, Pierre-Philippe, Gilles Duranton, and Henry G. Overman.2005. Agglomeration and the adjustment of the spatial economy.Papers in Regional Science 84(3):311–349.

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da Mata, Daniel, Uwe Deichmann, J. Vernon Henderson, Somik V. Lall,and Hyoung Gun Wang. 2007. Determinants of city growth inBrazil. Journal of Urban Economics 61(forthcoming).

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Duranton, Gilles and Diego Puga. 2001. Nursery cities: Urbandiversity, process innovation, and the life cycle of products.American Economic Review 91(5):1454–1477.

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