Urbanization and Growth

Originally posted at WorldBank Poverty and Growth Blog.

Urbanization is increasing at a rapid pace. Between 2005 and 2030, the world’s urban population is expected to grow at an average annual rate of 1.78 per cent, almost twice the growth rate of the world’s total population. The proportion of people living in rural areas will shrink significantly after 2015. While increasing urbanization has led to greater per capita incomes and productivity, at the same time, it has led to increasing informal sector, greater urban poverty, increasing number of slums, scarcity of housing, spiraling urban real estate prices, and inadequate infrastructure facilities. Given this phenomenon of economic concentration in one area and spatial disparities elsewhere, the key issue is “should rural labor move to jobs or should jobs move to rural areas?”  Finance and labor do not automatically move towards poorer areas. Available evidence from across the world suggests that policy makers should strive to remove impediments to capital and labor flows and reinforce agglomeration economies.  This can be done by policy makers encouraging labor movement by abolishing national minimum wages, cutting unemployment benefits and social benefits, and abolishing rent control to increase supply of housing.  Similarly, improving business climate, increasing access to finance, including microfinance and availability of credit to small enterprises, and developing infrastructure services before firms move in, are likely to affect the decisions of firms in location of their productive activities.  Strengthening the capacity of provincial and local governments in provision of essential services would be key to reduce economic concentration and spatial disparities.

Meeting the Millennium Development Goals means addressing these development issues in cities. Urban planning is now not a luxury, but a necessity. The Commission of Growth and Development succinctly summarizes the urbanization process by noting that “If history is any guide, large-scale migration to the cities is part and parcel of the transformation economies must go through if they are to grow quickly…..Ultimately a successful city will need urban planning, building codes, and robust property rights. It will need drainage, sewerage, rapid transit, and a sophisticated financial system capable of mobilizing the funds for these. But accumulating this infrastructure, expertise, and sophistication takes time. Governments should avail themselves of whatever shortcuts they can find, including the experience and expertise of other cities that have gone through this turmoil before them”.