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Presentation by Gilles Duranton, "Cities and growth"
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Cities and growth
Gilles DurantonWharton
oecd, 26 September 2014
City population growth Urbanisation
Technological change
Growth in output per capita
Three sets of issues
• The effect of economic growth and technological change
on cities
• The interaction between urbanisation and development
• The effects of cities on economic growth and
technological change
What drives the population growth of cities?
It is a hard question but much easier than the identification
of drivers of country growth
• Many more cities than countries
• Far fewer determinants
• Lots more data
• Population is easier to count than gdp
• Data heterogeneity is less
• A common history makes identification easier
As a result, some progress
The main drivers of population growth for US
cities
• Amenities
• Roads
• Human capital and entrepreneurship
Some caveats
• We know a lot more about us cities but most results have
been replicated elsewhere in fully urbanised countries
• Despite some well identified channels, we can explain
maybe half the story
• There are some areas of complete ignorance. For instance:
– Urban policies
– Urban leadership / governance
Amenities
• Very strong association: 1 s.d. of January temperature
leads to 0.6 s.d. of population growth
• Focusing on exogenous amenities alleviates simultaneity
concerns
• Warm Januaries may still be correlated with other
growth factors
• Main explanation: a wealth/demand effect
Transport
• Another strong association: 1 s.d. of Interstate Highway
km leads to 0.7 s.d. of population growth
• Roads also induce urban decentralisation
• Roads are not randomly given. Identification using
historical instruments, random placements of rural roads,
historical accidents
• Main explanation: roads lower travel costs and make a
city cheaper as predicted by the monocentric model
• Wrinkle: the effects of roads on population growth is
‘small’
• More generally, transport technology greatly shapes cities
Human capital
• The third strong association: 1 s.d. of the initial share of
university graduates leads to 0.25 s.d. of population
growth
• Worry the more skilled may choose to locate in fast
growing cities
• A variety of identification strategies including the
establishment of land grant colleges c. 1860
• Entrepreneurship as a specific form of human capital
• Key underlying mechanism: cities are better places for
exploiting human capital and accumulating it through
learning
Summary
• Amenities, roads, and human capital are the main known
drivers of city population growth
• Results are broadly consistent across rich (‘oecd’)
countries that are fully urbanised
• Less is known about city growth in developing countries
which are still urbanising
• Transportation matters perhaps more whereas the role of
amenities is in doubt
• This is the world inside the technology frontier and inside
the urbanisation frontier that comprises the large
majority of mankind
The classic plot
4
6
8
10
12
0 20 40 60 80 100
log GDP per capita, 2011
rate of urbanization, 2012
Source: World Bank. 189 countries. The horizontal axis urbanization
rate is the percentage share of population living in cities in 2012. The
vertical axis represents the natural log of GDP per capita in current US
dollar for 2011.
• Well known, extremely robust
• Each extra percentage point of urban population is
associated with an extra 5 percent of gdp per capita
• Agglomeration economies can explain at most a small
part of the relationship (a fifth?)
• Models of structural change?
– Simple models of manufacturing pull require
quantitatively implausible parameter values
– Models of rural push are even worse
– Suggestive of strong frictions in the process or that
urbanisation is an outcome of ‘development’
– We need to take this question more seriously. 50
million rural dwellers move to cities every year
The really important but really hard question
Do cities affect growth?
• We can write models where they do
• Identifying out of the cross-section of countries is really
hard
• Route 1: use the cross-section of cities
– But many questions will be hard to analyse
– We cannot look at gdp growth directly but only at
correlates of growth
• Route 2: rely more strongly on models
A well-established fact...
Innovative activity is geographically highly concentrated
• R&D labs are much more concentrated than labour in
the us
• Several large us cities receive a share of patents that is 5
times of more their share of population
• For small metropolitan, the population share is nearly 3
times the patent share
• For non-metro areas, it is more than 10 times.
• Strong tendency for R&D labs and establishments in
R&D intensive activities to locate extremely close to each
other
... and its corollary
Proportionately more innovations in larger and denser cities
• Elasticity of patents to city population / density of about
0.1-0.2
• Compare with elasticity of wages / tfp to population /
density of 0.02-0.05
• Bell-shaped
• Perhaps due to spatial knowledge spillovers (evidence
from citations trails)
• Some indications that diversity matters
Some caveats
• Causality is not as firmly established at it should
• What fraction of innovation do cities account for (relative
to a world without cities?)
Agglomeration and physical capital accumulation
The accumulation of physical capital accounts for some of the
economic growth we experience. What role do cities play?
Assume a neoclassical growth model:
• Goods production in cities uses buildings, machines, and
labour
• It is subject to agglomeration economies (estimated at
7%)
• Buildings/housing are produced using land and capital
• Residents consume housing and other goods
Calibrating this on existing us data, the growth rate is found
to be 10% lower absent agglomeration effects
Agglomeration and human capital accumulation
The accumulation of human capital also accounts for some of
the economic growth we experience, perhaps more. Human
capital also plays an important role in cities.
Assume a model of human capital accumulation:
• In cities, agglomeration economies make human capital
more productive
• In turn, this incentivises human capital accumulation
• As human capital in cities become more productive, this
makes city grow in population (and human capital)
Fitting standard parameter values about the costs and
benefits of cities implies that cities account for more than half
the growth caused by human capital accumulation
Some takeaways
• Technological change and economic growth affects cities
– Supply factors (transport, human capital)
– Demand factors (demand for amenities)
• Urbanisation and development
– The jury is still out
– Suggestions that cities and urbanisation are more
than a problem of “accommodation” in development
• Do cities affect growth?
– Cities are where modern growth is taking place
– Suggestions that they mildly foster the accumulation
of physical capital
– Suggestions that they may have a large effect on
human capital accumulation
• Important urban policy dilemmas
– Tension between urban durability and the flexibility
required for innovation
– Tension between the need to keep cities simple and
manageable and accommodating the diversity that
underpins urban dynamism
– Tension between local policies that want to anchor
specific economic activities and national efficiency
that requires the most productive activities to expand
wherever they might be