Urban Development and Economic Growth in Bangladesh

Somik LallThe World Bank

Workshop on Growth & Employment, December 12, 2005

Outline• Bangladesh is predominantly rural but rapidly

urbanizing• Across countries, urbanization is typically seen to

accompany and lead economic growth (economic and institutional transformation)

• Performance of individual cities is conditioned on local efforts as well as national / regional circumstances

• Rapid population growth poses challenges for providing consumer and producer services

• What strategies are useful for improving the contribution of the urbanization process to economic growth?

Across countries, urbanization accompanies economic transformation

0

10

20

30

40

50

60

70

80

1965 1970 1975 1980 1985 1990 1995 1999

Ag

ricu

ltu

re %

0

5

10

15

20

25

30

35

40

45

Labor force in agriculture (% of total) Agriculture, value added (% of GDP)

Urb

an

%

Urban population (% of total)

Source: World Development Indicators 2001

And the Importance of agriculture diminishes as countries get richer

100

1,000

10,000

100,000

1 10 100

Agriculture, value added as percent of GDP, 2000

Pe

r c

ap

ita

GD

P, 2

00

0

Bangladesh

Source: World Bank Indicators (2000 data)

0

20

40

60

80

100

120

140

160

180

200

Po

pu

latio

n, m

illio

ns

Total

Rural

Urban

Source: United Nations World Urbanization Prospects

Share of urban population is rapidly increasingIn Bangladesh

0

5

10

15

20

25

30

35

40

1950

1960

1970

1980

1990

2000

2005

2015

2030

Urban Population (%)

0

10

20

30

40

50

60

70

80

90

100

1 3 5 7 9 11 13 15 17 19 21 23 25

km

Pe

rce

nt 5,000

10,000

20,000

Cumulative rural population by distance from different size towns

Source: GIS calculations using WARPO/CEGIS data; based on 1991 census figures.Percentages are likely to be higher today as towns have increased in size and as rural areas near larger towns have grown faster than more remote areas.

And much of the rural population is in close proximity to urban centers

Urbanization has been characterized by ‘excessive’ concentration in a few agglomerations

Table 1: Population growth of the largest agglomerations

City Population Rank (2000)

Population (2000)

Population (1990)

Population (1980)

Population (1970)

Annual Growth (1970-2000)

Dhaka 1 12300 6619 3248 1474 7.1% Chittagong 2 3581 2265 1333 693 5.5% Khulna 3 1426 972 622 310 5.1% Rajshahi 4 1016 517 238 105 7.6% Mymensingh 5 328 189 108 N.A. - Comilla 6 307 135 126 86 4.2%

Note 1: Population in thousands; Note 2: Data are for agglomerations;

At the other end of the size distribution: 300 other urban areasaccount for only 4 percent of the urban population

Urban concentration is consistent with countries at similar income levels

Urban concentration in comparator counties (%)

South Asia Region Per capita Incomes Land area Historic Incomes Country Primacy Country Primacy Country Primacy Country Primacy India 5.72 Cameroon 22.48 Bulgaria 20.84 Colombia

(75) 20.16

Pakistan 21.94 Mongolia 56.27 Guatemala 20.09 Honduras (85)

35.48

Senegal 43.53 Korea 23.28 Armenia (95)

50.85

Kyrgyz Republic

45.50 Honduras 27.25 Turkey (75) 21.63

Data Source: WDI Tables, SIMA

• Dhaka accounts for 32% of urban population• Concentration is important for efficiency in early stages of

development• There is an optimal range of concentration which varies with

economic development – increases, peaks, declines

Core-periphery pattern, with Dhaka as the primary center and the port cities (Khulna and Chittagong) as secondary centers

Economic activity is also concentratedaround major agglomerations

Factors promoting urban concentration

• National political institutions : – Allocation of local public expenditures in centralized

settings: national government may favor one or two cities where decision-makers live.

– Favoritism involving the national government not choosing to invest sufficiently in interregional transport and telecommunications, so hinterland cities are less competitive locations; and

• Central government is directly responsible for urban and regional development

• Failures of national land development markets– With limited local fiscal autonomy, land developers and local

governments cannot develop alternate locations and spread development across the urban hierarchy.

Implications of urban concentration (positives)

• Benefits from economies of scale and agglomeration

• Economic transformation with large cities leading manufacturing / industrial representation– Dhaka and Chittagong have over seven times the national

representation of employment in garments and machinery. – Co-location of business and financial services boost firm

level performance

• Thick labor markets• Higher quality of life for residents as these cities can

do better in proving local public goods and services

Implications of excessive urban concentration (costs)

• High prices for immobile factors (land and housing)

• High commuting costs (leading to a segmented labor market), along with congestion and pollution diseconomies

• Management failures lead to bottlenecks in infrastructure and service provision, thereby increasing production costs

• This translates into lower welfare and overall economic performance

Microgram/m

3

PM2.5 Average

0

50

100

150

200

250

300

350

12/25/2002

12/27/2002

12/29/2002

12/31/2002

1/2/2003

1/4/2003

1/6/2003

Dhaka was ranked as one of the most polluted cities in the World , but PM2.5 concentrations have declined by

41% because of Two Stroke Phaseout

Low satisfaction with public services

Table 1: Satisfaction with Services (% of surveyed households)

Services Dhaka Chittagong Khulna Rajshahi

Police 2 0 1 2

Land Registration 2 1 10 4

Transport 7 3 19 6

Electricity Services 8 2 12 2

Judiciary 8 1 2 5

Health Care 11 4 18 9

Garbage Disposal 15 10 12 10

Sewerage/

Sanitation

17 16 11 16

Education 21 5 28 12

Drinking Water 27 9 11 8

Source: Proshikha (2002)

Does the distorted urban system translate into lost opportunities for economic growth?

• The central link between concentration and economic performance revolves around economies of scale.

• If cities are too small, resources could be spread too thinly/evenly across cities and scale economies are not efficiently exploited.

• However, if resources are over-concentrated in one or two excessively large cities, this raises costs of production of goods and lowers the quality of urban service provision.

Table 1: The Effect on Annual Economic Growth Rates of Urban Concentration

The optimal degree of urban

primacy

Loss in growth rate from excessive primacy (one

standard deviation)

Growth effect of a one standard deviation increase in road density in a country

with excessive primacy Low income ($1100) .15 .71 .23 Medium income ($4900)

.25 1.6 .68

High income ($13400)

.23 1.6 .68

The table looks at a medium size country --national urban population of 22 million. Numbers for countries with urban populations of up to 50-60 million are similar. The first column calculates the degree of urban primacy that maximizes growth rates and steady state income levels. Error bands about this for medium or higher income countries are quite tight (standard error of .018). The growth losses of excessive primacy are high, although more so, as income rises. The role of transport investment (length of the national road system divided by national land area) is quite significant, particularly as countries enter middle income phases when deconcentration becomes critical.

Growth implications for Bangladesh

• In 2000, Urban population of 35 million; income per capita (1987 PP) of around $2100.

• At this income level and urban scale, Bangladesh should have an ‘optimal’ primacy value of around 21 percent.

• In practice, primacy is 32 percent -- 11 percent points higher than optimal values.

• Based on Henderson’s estimates, primacy in Bangladesh is more than 2 standard deviations higher that the optimal range.

• At this income range and urban scale, one standard deviation increase from optimal values reduces growth by 1 percent. A lower bound estimate of moving from two standard deviations above optimal value to the optimal value would increase GDP per capita growth rates by at least 2 percent points.

How do we improve the contribution of the urbanization process to economic growth?

• Improving management of the largest agglomerations

• Dhaka (and other major cities) will continue to attract rapid population growth unless other urban centers become viable investment decisions.

• Performance of major agglomerations need to be enhanced– Institutional reform– Provision of serviced land– Enhancement of own source revenues

• Investments in inter regional infrastructure to de-concentrate standardized manufacturing

How do we improve the contribution of the urbanization process to economic growth?

• Developing alternate locations• Enhance the ability of Pourashavas to provide local

services that are valued by local resident (but how?)

• BMDF may be a useful vehicle for local infrastructure improvements

• There may however be adverse welfare consequences if resources are spread too thinly or large cities are starved in order to stimulate smaller centers