Urbanisation in developing countries: a completely different kettle of fish

Many developing countries are highly urbanised but lack large industrial sectors. Reuters/Akintunde Akinleye

Dietrich Vollrath, University of Houston; Doug Gollin, University of Oxford, and Remi Jedwab, George Washington University
The patterns of urbanisation in the developing world in the past few decades have diverged significantly from historical trends. For the developed world, significant urbanisation was associated with industrialisation. With the cities came the factories.
But today many developing countries, though highly urbanised, lack large industrial sectors. Nigeria, for example, has the same percentage of its population living in cities as China does.
In our forthcoming paper we find that the historically tight relationship between urbanisation and industrialisation breaks down for much of the developing world. In particular, this divergence is reflected in the large number of natural resource exporters that have urbanised without industrialising.

How it happens in natural resource exporters

We compared urbanisation rates to the share of manufacturing and services represented in GDP (2010). This indicates that non-resource exporting countries maintain a tight positive relationship between industrialisation and urbanisation. This is consistent with the historical association.
No such relationships exist for countries that rely more heavily on natural resource exports. Several resource-exporters reach 80% urbanisation rates, despite having only 20% of their GDP come from manufacturing and services.
The breakdown of the link between urbanisation and industrialisation is pronounced across regions. In Asia and Latin America urbanisation is tightly linked to shares of manufacturing and services in GDP. But in Africa and the Middle East no such association is apparent. Here an increasing share of natural resources in GDP is tightly correlated with urbanisation.

In Asia and Latin America urbanisation is tightly linked to shares of manufacturing and services in GDP. Reuters/Paulo Whitaker

Our paper makes these correlations more explicit, and confirms that they are robust. We used a sample of 116 developing countries observed each decade from 1960 to 2010. Our study shows that under a variety of specifications there is a statistically significant and economically meaningful association between resource exports and urbanisation rates.
In our preferred panel specifications, a one standard deviation increase in resource exports is associated with a 0.51 standard deviation increase in the urbanisation rate. Put more simply, it translates into roughly a 13 percentage point increase in urbanisation.
To confirm this phenomenon, we look for evidence of a causal link between resource-exports and urbanisation rates. We capture the effect of resource-led exports on urban growth by using new resource discoveries and international price shocks as a variable. Think of our approach as a kind of “difference-in-difference” estimation.
Over the study time period, countries that discovered new resources are assigned to the “treatment” group. An example is Botswana’s diamond discovery in 1968. Countries that do not experience major resource discoveries serve as the “control” or comparison group.
Our results are consistent with the cross-section and panel findings: resource exports do in fact cause a significant increase in urbanisation rates. The effect is not driven by a handful of extreme resource-exporters, such as Saudi Arabia. Instead, it holds across a whole range of developing nations. The size of the estimated effect is quite strong. This indicates that an appreciable shock to resource exports – from say a discovery – can raise the urbanisation rate by 10-12 percentage points over several decades.

Urbanisation, jobs and poverty

The effect of resources on urbanisation runs deeper than this, though. The composition of urban employment differs starkly between resource-exporters and non-exporters, holding income levels and urbanisation rates constant.
Using IPUMS census micro-data, labour force surveys and household survey data, we look at the sectoral composition of urban areas in a sub-sample of 88 countries. We find a key distinction in the labour allocations of resource-exporters and non-exporters.

China’s urban centres are best characterised as “production cities”. Reuters/Aly Song

We characterise resource-exporting urban centres as “consumption cities”. This is where a large fraction of workers are employed in non-tradable services such as commerce and transportation or personal and government services. In contrast, urban centres in China or other historical cities are best characterised as “production cities”. Here a large fraction of workers are engaged in manufacturing or in tradable services, such as finance.
This does not imply that resource-exporting cities are necessarily poorer. Unconditionally, natural resource exporters have lower poverty rates and slum shares than non-exporters. But if we control for income levels and urbanisation rates, resource exporters appear to have higher poverty rates and slum shares. The results of our comparison suggest that the positive effect of income on living standards is lower for resource exporters.
To illustrate why industrialisation and urbanisation need not be synonymous, we develop a model of structural change that features two types of urban production: tradable and non-tradable goods. The basic logic is that urbanisation is driven by income effects. Any income shock will cause a shift away from economic activities in rural areas and encourage the movement of production and people into urban areas. This is true whether the income shock is caused by industrial productivity or resource revenues.
But the source of the shock does matter for which sector the new urban workers will be employed in. With a resource shock, there is a Dutch Disease outcome. Workers substitute away from the tradable goods sector and into non-tradable. Hence the cities grow into “consumption cities”, dominated by non-tradable employment.
A productivity shock in the tradable sector pulls workers into that sector and away from rural areas. This leads to urbanisation in “production cities” being dominated by tradable production.

Implications for development

Resource-exporting countries thus urbanise without acquiring the industrial sectors that we typically associate with development. The “consumption cities” of resource-exporters may exert an influence on future growth. Much research in the growth literature suggests that convergence is faster in industrial sectors than in services. This suggests that the source of urbanisation, while inconsequential to the level of urbanisation, may be consequential for development in the long run.

Cities such as San Francisco were once “consumption cities” but have become “production cities”. Kirby Lee/USA Today Sports

Shanghai and Lagos, for example, are cities in countries with similar urbanisation rates. But it seems unlikely that at this point Lagos contains the same potential for growth as Shanghai.
At the same time, resource-led urbanisation does not necessarily imply that development is impossible. Cities such as San Francisco, Denver and Houston could be considered “consumption cities” in their past. Over time, however, they have developed into what we would term “production cities”.
We believe there is value in showing that urbanisation is more than a synonym for industrialisation. Given the widespread reliance on resource exports, especially in Africa, a significant portion of urbanisation in the developing world over the past few decades has been driven by resources. Understanding the dynamics of resource-led urbanisation will be important for thinking about the growth of cities and the process of development.
This article is an edited extract from a blog published by the International Growth Centre.

Dietrich Vollrath, Associate Professor of Economics, University of Houston; Doug Gollin, Lead Academic, Ethiopia team, University of Oxford, and Remi Jedwab, Assistant Professor of Economics and International Affairs, George Washington University
This article was originally published on The Conversation. Read the original article.