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)

13

But key features are missing

• Primate city favouritism

• Market access

• Dual labour markets

• Migration

• Dual housing markets (to be done)

14

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)

15

=− 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)

16

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)

21

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

23

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)

24

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)

25

What about policy?

26

Static vs. dynamic efficiency

Traditional urban policies: static in nature

• Housing

• Traffic congestion / public transport

• Delivery public services

• Access / Infrastructure

• Reduction in primacy

• Etc

27

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

29

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

31

References

Ades, Alberto F. and Edward L. Glaeser. 1995. Trade and circuses:Explaining urban giants. Quarterly Journal of Economics110(1):195–227.

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.

31-1

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.

da Mata, Daniel, Uwe Deichmann, J. Vernon Henderson, Somik V. Lall,and Hyoung Gun Wang. 2005. Examining the growth patterns ofBrazilian cities. Policy Research Working Paper 3724, World Bank.

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).

Davis, James C. and J. Vernon Henderson. 2003. Evidence on thepolitical economy of the urbanization process. Journal of UrbanEconomics 53(1):98–125.

Deichmann, Uwe, Kai Kaiser, Somik V. Lall, and Zmarak Shalizi. 2005.Agglomeration, transport, and regional development in indonesia.Policy Research Working Paper 3477, World Bank.

31-2

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

Duranton, Gilles and Diego Puga. 2004. Micro-foundations of urbanagglomeration economies. In Vernon Henderson andJacques-François Thisse (eds.) Handbook of Regional and UrbanEconomics, volume 4. Amsterdam: North-Holland, 2063–2117.

Duranton, Gilles and Diego Puga. 2005. From sectoral to functionalurban specialisation. Journal of Urban Economics 57(2):343–370.

Eaton, Jonathan and Zvi Eckstein. 1997. Cities and growth: Theory andevidence from France and Japan. Regional Science and UrbanEconomics 27(4–5):443–474.

Fujita, Masahisa, Paul R. Krugman, and Anthony J. Venables. 1999. TheSpatial Economy: Cities, Regions, and International Trade. Cambridge,MA: MIT Press.

31-3

Harris, John R. and Michael P. Todaro. 1970. Migration, unemploymentand development: A two-sector analysis. American Economic Review60(1):126–142.

Head, Keith and Thierry Mayer. 2004. The empirics of agglomerationand trade. In Vernon Henderson and Jacques-François Thisse (eds.)Handbook of Regional and Urban Economics, volume 4. Amsterdam:North-Holland, 2609–2669.

Henderson, J. Vernon. 1988. Urban Development: Theory, Fact andIllusion. Oxford: Oxford University Press.

Henderson, J. Vernon. 2005. Urbanization and growth. In PhilippeAghion and Steven N. Durlauf (eds.) Handbook of Economic Growth,volume 1B. Amsterdam: North-Holland, 1543–1591.

Henderson, Vernon. 2002a. Urban primacy, external costs, and thequality of life. Resource and Energy Economics 24(1):95–106.

31-4

Henderson, Vernon. 2002b. Urbanization in developing countries.World Bank Research Observer 17(1):89–112.

Henderson, Vernon. 2003. The urbanization process and economicgrowth: The so-what question. Journal of Economic Growth 8(1):47–71.

Henderson, Vernon, Todd Lee, and Yung Joo Lee. 2001. Scaleexternalities in korea. Journal of Urban Economics 49(3):479–504.

Klenow, Peter and Andrés Rodríguez-Clare. 2005. Externalities andgrowth. In Philippe Aghion and Steven N. Durlauf (eds.) Handbookof Economic Growth, volume 1A. Amsterdam: North-Holland,817–861.

Krugman, Paul R. and Raúl Livas Elizondo. 1996. Trade policy and thethird world metropolis. Journal of Development Economics49(1):137–150.

31-5

Lall, Somik V., Richard Funderburg, and Tito Yepes. 2004a. Location,concentration, and performance of economic activity in Brazil.Policy Research Working Paper 3268, World Bank.

Lall, Somik V., Jun Koo, and Sanjoy Chakravorty. 2003. Diversitymatters: The economic geography of industry location in India.Policy Research Working Paper 3072, World Bank.

Lall, Somik V., Harris Selod, and Zmarak Shalizi. 2006. Rural-urbanmigration in developing countries: A survey of theoreticalpredictions and empirical findings. Policy Research Working Paper3915, World Bank.

Lall, Somik V., Zmarak Shalizi, and Uwe Deichmann. 2004b.Agglomeration economies and productivity in Indian industry.Journal of Development Economics 73(3):643–673.

Lucas, Robert E. Jr. 1988. On the mechanics of economic development.Journal of Monetary Economics 22(1):3–42.

31-6

Moomaw, Ronald L. and Ali M. Shatter. 1996. Urbanization anddevelopment: A bias towards large cities? Journal of Urban Economics40(1):13–37.

Nitsch, Volker. 2006. Trade openness and urban concentration: Newevidence. Journal of Economic Integration 21(2):340–362.

Overman, Henry G. and Anthony J. Venables. 2005. Cities in thedeveloping world. Report, Department for InternationalDevelopment (UK).

Ravallion, Martin and Quentin Wodon. 1999. Poor areas, or only poorpeople? Journal of Regional Science 39(4):689–711.

Richardson, Harry W. 1987. The costs of urbanization: A four-countrycomparison. Economic Development and Cultural Change35(3):561–580.

31-7

Saiz, Albert. 2006. Dictatoship and highways. Regional Science andUrban Economics 36(2):187–206.

Thomas, Vinod. 1980. Spatial differences in the cost of living. Journal ofUrban Economics 8(2):108–122.

Timmins, Christopher. 2006. Estimating spatial differences in theBrazilian cost of living with households location choices. Journal ofDevelopment Economics 80(1):59–83.

31-8