productivity growth associated with higher economic concentration, increased specialization and...
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Urbanization and Economic Growth
Key Questions1. Is there a link between
urbanization and economic growth?
2. Is China’s urbanization path unique?
3. How to pursue an urbanization strategy towards a high income economy?
Key Questions1. Is there a link between
urbanization and economic growth?
2. Is China’s urbanization path unique?
3. How to pursue an urbanization strategy towards a high income economy?
Urbanization is a very strong indicator of growth…
0 10000 20000 30000 4000010
20
30
40
50
60
70
80
90
100
53.38
92.49
64.11
89.19
67.67
53.64
28.39
75.02
97.49
35.57
66.81
48.27
61.61
Brazil
73.08
20.00
52.09
80.66
39.10
89.15
China
75.29
34.28
63.65 64.64
51.28 57.82
86.93
69.64 67.42
43.54
64.76
39.51
17.02
83.69 85.74 86.15
57.21
Germany
61.46
49.78 52.15
93.73
India
62.21
91.88
68.40
Japan
82.71
53.64
23.98
Korea, Rep.
35.39 34.22
87.25
27.57
48.18
85.41
59.32
72.68
41.51 41.80
78.11
47.66
63.29 57.04
31.22 38.39
83.13
57.56
79.37
36.22
75.20
61.90
77.24
48.89
61.04
Russian Fed-eration
19.12
42.56
56.38
100.00
South Africa
77.43
15.13 21.28
85.21
73.71
26.55 26.74 34.11
38.02
66.31 71.41
15.58
68.88
79.64 United States
92.54 93.50
31.04 39.17 38.62
Urbanization and per capita income levels in 2011
GNI per capita (constant 2000 US $)
Urb
an
po
pu
latio
n (
pe
rce
nt)
…but an increase in urbanization is not always resulting in higher growth
1. Almost no country has reached income levels of more than $10,000 before reaching an urban population of about 60 percent
2. But, international experience shows that while economic growth and urbanization is highly correlated, there is no evidence that an increase in urbanization leads to higher growth
Urbanization as a by-product of spatial and structural transformation
1. It is argued that urbanization is a byproduct of structural transformation out of agriculture into effective development of the manufacturing sector
2. Differences in relative wages have been one of the key drivers of migration to cities
3. But higher wages in cities are often offset by higher costs of housing and greater congestion
4. The same is true for firms: the higher productivity of increased agglomeration can be undermined by higher costs of real estate and labor
Key Questions1. Is there a link between
urbanization and economic growth?
2. Is China’s urbanization path unique?
3. How to pursue an urbanization strategy towards a high income economy?
China’s impressive economic growth has been accompanied by a massive population shift…
19631966
19691972
19751978
19811984
19871990
19931996
19992002
20052008
20110%
10%
20%
30%
40%
50%
60%
70%
0%
10%
20%
30%
40%
50%
60%Structure of labor market and urbanization rate, 1963–2011 (%)
Employment in services
Employment in industry
Urbanization rate (RHS)
…attributable to China’s policies and actions
1. China reformed agriculture. A household responsibility system for farmers and mechanization unleashed efficiency gains in agriculture
2. China gradually relaxed constraints on internal migration.
3. China industrialized, adopting modern manufacturing technologies and opening access to global markets.
4. Changing the social security system, broadening access to higher education, and demobilizing the military further accelerated the urbanization process.
In absolute terms the scale of China’s transformation is unprecedented…
1. With more than 700 million urban residents, China has become the world’s largest urban nation in human history.
2. Between 1978 and 2012, China’s urban population increased by more than a half billion people—more than twice as many as in India in the same period.
3. China’s urban population is expected to increase by about 250 million more over the next two decades.
…but in relative terms many countries have experienced rapid urbanization
Korea (1
960-1990)
Saudi A
rabia
(1960-1990)
Angola
China
Malaysi
a
Algeria
Indonesia
Korea, R
ep.
Oman
Turke
y
Canad
a (1880-1910)
Panam
a
Jordan
Lao PDR
Bolivia
Nigeria
Ecuad
or
Camero
on
El Sa
lvador
Paragu
ayGhan
a
Belaru
sBraz
il
Dominican Rep
ublic
Iran, Is
lamic R
ep.
Albania
Mozambique
German
y (1880-1910)
Saudi A
rabia
Portuga
l
Netherl
ands
Spain
(1960-1990)
Mongolia
Mean Dev
eloping C
ountries
(1978-2012)
United St
ates (
1880-1910)
United Kingd
om (1850-1880)
0
5
10
15
20
25
30
35
40
45
50 Change in urbanization rate (percentage points) 1978-2012
Key Questions1. Is there a link between
urbanization and economic growth?
2. Is China’s urbanization path unique?
3. How to pursue an urbanization strategy towards a high income economy?
China’s Urbanization at a crossroadsRural-urban transformation has been
beneficial to growthGDP growth on average 10 percent annually Real income increase 16-times Half a billion people lifted out of poverty
Gains from spatial reallocation of labor are set to decline (Lewis turning point)Exports can no longer be a driver of economic growth Growth increasingly dependent on capital accumulation
Urbanization that worked in the past will not work in future
1. Urbanization has created stresses that have undermined economic growth• Rapid urbanization of land have resulted in inefficiencies
due to urban sprawl (cities “came” to farmers), congestion• Urbanization of people has lagged urbanization of
employment – social divisions have increased• Industry-led urban growth has been resource intensive
and damaging to environment
2. The initial conditions for the next phase of urbanization are vastly different• Urban firms have to create high skilled jobs that promote
industrial upgrading, structural transformation towards high value added industries and services
• Urban residents will demand better lifestyles and amenities
Growth drivers of China’s new urbanization trajectory
Productivity growth associated with higher economic concentration, increased specialization and efficient
allocation of factors of productionGrowth will originate in citiesSupply SideY=f(H,K, L)
Demand SideY=C+I+G+NX
Agglomeration
knowledge sharing, labor matching and pooling (Human capital)
Consumption and social amenities associated with density (Consumption)
Specialization Economies of scale (TFP)
External competiveness (Net Exports)
Mobility and connectivity
Free mobility of factors of production lead to higher economic returns
Mobility requires public services and investments (G, I)
Higher densities are associated with higher incomes and consumptionEmerging urban middle class will demand better services and lifestyles
Higher urban incomes lead to higher consumptionUrban middle class is willing to pay more for housing in high density areas
that are associated with consumption amenities
Figure 1: Higher densities are associated with higher incomes and consumption levels Incomes per capita are higher in cities that are more
densely populated... …and consumption levels per capita.
Household income per capita and population density in China’s provincial level cities 2010
Retail sales per capita and population density in China’s provincial level cities 2010
World Bank staff estimates based on CEIC dataset. World Bank staff estimates based on CEIC dataset.
3.9
4.0
4.1
4.2
4.3
4.4
4.5
4.6
1.25 1.75 2.25 2.75 3.25 3.75 4.25Lo
g o
f H
ou
seh
old
in
com
e p
er c
apit
a,
2010
Log of Population density 2010
3.5
3.7
3.9
4.1
4.3
4.5
4.7
4.9
5.1
5.3
1.25 1.75 2.25 2.75 3.25 3.75 4.25
Lo
g o
f re
tail
sale
s o
f co
nsu
mer
g
oo
ds
per
cap
ita
in 2
010
Log of Population density 2010
Falling urban densities undermine forces of agglomerationLow and falling population densities have undermined
agglomeration
Figure 1: Population densities of Chinese cities have fallen Urbanization of land faster than
urbanization of people…. …Population concentration in China is similar
to other former planned economies Percentage changes in built-up area and urban
population by city size, 2000-2010 Gini coefficients of urban population of cities
Source: World Bank Staff Calculations based on 2000 and 2010 Population Census, CEIC (China). Methodology: Weighted average.
0%50%
100%150%200%250%300%
> 15 million
10-15 million
5-10 million
1-5 million500t - 1 million
250t - 500t
< 250t
Built-up area
Urban population changes
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Lack of specialization in high value added services
Maturing industries are not moving to secondary cities fast enoughThe largest cities have are not sufficiently specialized in high value
added services
Figure 1: Despite recent trends, a large share of manufacturing remains in large and medium sized cities
LQ manufacturing in the United States and China by city size
LQ financial services in the United States and China by city size
World Bank Staff Calculations based on 2010 Population Census, CEIC (China) and Bureau of Economic Activity (the United States).
0
0.5
1
1.5
2
2.5
3
3.5
> 15million
10-15million
5-10million
1-5million
500t - 1million
250t -500t
< 250t
UnitedStates
China
-
0.5
1.0
1.5
2.0
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> 15million
10-15million
5-10million
1-5million
500t - 1million
250t -500t
< 250t
United States
China
Constraints to labor mobility have not been eliminated
Compared to other countries of similar levels of income, China’s urbanization is lower
Figure 1: Compared to other countries China has lower urbanization rate Urbanization rate and year in which country reached China’s current income per capita level
Memorandum: China’s income per capita defined at 8825 international dollars. Source: Maddison World Economic History database, WB WDI, UN World Urbanization Prospects: The 2011 Revision, US Census Bureau website and Zhuo Xian’s estimates (2013).
Singapore Kuwait
QatarBelgium
VenezuelaUruguayArgentina
Israel Chile Australia
Saudi ArabiaUK
KoreaCzech Russia
DenmarkNZ Sweden OmanBelarus
BulgariaGermany TurkeyJapan Spain EstoniaCanada Hungary Latvia
MalaysiaLithuania FR
AustriaArmenia
USA Italy
Finland Poland
NetherlandsNorway Greece
Croatia
Switzerland
SlovakiaIreland
Kazakhstan
Azerbaijan
Portugal
SloveniaThailand
30
40
50
60
70
80
90
100
1940 1950 1960 1970 1980 1990 2000 2010 2020
China
Distortions in factor markets have led China’s urbanization astray
Frictions in labor market mobility slow down income convergence
Capital market
distortions slow
specialization
Land market
distortions result in falling
densities
New urbanization strategy to strengthen China’s growth engine
The role of government will have to change letting market forces a grater role and getting out of provision of non-public goods and services1. Adjusting land and financial sector policies to
strengthen forces of agglomeration and specialization
2. Empowering the middle class by letting migrants to become urban residents
3. Continuing providing public goods and services to support mobility and connectivity