Abstract
This chapter on urbanization and growth focuses on modeling and empirical evidence that pertain to a number of inter-related questions. Why do cities form in an economy, with so much of economic activity in countries geographically concentrated in cities? Second, how do different types of cities interact with each other in terms of trade and migration? Given the answers to these questions the chapter turns to growth issues.
How does a system of cities evolve under economic and population growth; and how does urban growth intersect with, or even define national economic growth? In growth theory, endogenous growth is based on knowledge spillovers and sharing, and evidence suggests that much of that interaction must occur at the level of individual cities. In the early stages of growth, economic development is characterized by urbanization - a spatial transformation of the economy, where the population moves through migration from an agricultural, rural based existence to one where production occurs in cities of endogenous numbers and size. How do we model that transformation process and what are the key aspects of the transformation? In any static, growth, or development-urbanization context, how do governance, institutions, and public policy affect city formation and sizes, which then in turn affect economic efficiency. Cities require enormous public infrastructure investments which affect urban quality of life, in particular health and safety and commuting and congestion costs. Institutions governing land markets, property rights, local government autonomy, and local financing affect the city formation process and city sizes. And national government policies concerning trade, labor policies and national investment in communications and transport infrastructure affect the shape of the urban system. A final set of questions has to do with where cities locate. What is the effect of history, of climate and of natural resource locations, including rivers and natural harbors, on the location of current urban agglomerations?Keywords urbanization, system of cities, dual sector models, agglomeration, endogenous growth, rural-urban migration, growth models, spatial distributions
JEL classification: O1, O15, O18, O4, O41, R00, R11
The study of urbanization and growth focuses on five related questions. First, why do cities form and why is economic activity so geographically concentrated in cities? In the USA, only 2% of the land area is covered by the urban built environment. This incredible geographic concentration is the central focus of economic geographers. Economists dating from Marshall (1890) have answered the question by saying urban agglomerations are based on technological externalities - the information spill-over benefits in input and output markets of having economic agents in close spatial proximity, where information decay over space is very rapid. In addition the new economic geography develops the idea that close spatial proximity involves pecuniary externalities - reduces the costs of intermediate and final good trade. Agglomeration benefits are specified typically as applying within industries or sets of inter-related industries; there is considerable debate empirically about their application across industries. That issue, as we will see later, is related to the second set of questions.
How do cities interact with each other, at any instant in time? What are the trade patterns across cities in final and intermediate outputs and how does that correspond to the roles of big and small cities? In what ways are cities specialized by either products or functions, and why? How do these patterns of specialization and diversification relate to city labor force compositions and human capital accumulations?
Given the role of cities at a point in time, the third set of questions asks how urban growth intersects with, or even defines national economic growth? The close connection between urban and national economic growth was recognized by Lucas (1988) and inspired by the development of endogenous growth models.
To the extent endogenous growth is based on knowledge spillovers and sharing, given the role of close spatial proximity in spillovers, much of the interaction and sharing must occur at the level of individual cities. Given that, there must also be a close connection between economic development and urbanization. How are the two tied together? In addition the stochastic forces that shock production processes, invention, and technological progress must also play out in an urban form. How does that occur?The fourth set of questions asks how governance, institutions, and public policy affect urbanization, which then in turn affects economic efficiency and growth. Apart from the long standing analysis of provision and financing of local public goods, there are three issues of interest specific to the urbanization process. First, public infrastructure investments in cities are enormous and the internal structure of cities affects not just the resources devoted to urban living such as commuting and congestion costs, but also affects production efficiency - the extent to which information and knowledge spillovers are fully realized and exploited. Second, institutions governing land markets, property rights, local government autonomy, and local financing including local public debt accumulation affect the city formation process, city sizes, and national economic growth. Finally, national government policies concerning migration, trade policy, national investment in communications and transport infrastructure have profound impacts on the urban system, migration patterns, regional economic development and the like.
The final set of questions has to do with where cities locate and the economic geography of urbanization. In what regions do cities cluster and why are some regions so sparsely populated? What first nature forces of natural resource locations, including rivers and natural harbors, drive the location of economic activity? How do transport costs and technological change in transport costs affect the extent to which coastal versus hinterland regions are inhabited? And what is the role of second nature forces and history on location - how does the accumulation of economic activity based on historical market forces affect the current spatial patterns of economic activity?
This handbook chapter reviews evidence on all these questions and then turns to models that focus on aspects of the middle three questions - how do cities interact with each other; what is the relationship among urbanization, urban growth, national economic growth and economic development; and what is the role of institutions and public policy in shaping urbanization? In terms of the first question on why cities form, there is a splendid handbook paper by Duranton and Puga (2004) reviewing models of the micro-foundations of agglomeration economies and another by Rosenthal and Strange (2004) reviewing empirical evidence on the subject.
In terms of the where question, there is little in the way of models that look at the location patterns of individual cities. There are the core-periphery models of economic geography that analyze the allocation of economic activity within a country between a core and periphery region. We will discuss how these models may inform the where question for cities. But they are a topic unto themselves with excellent general handbook coverage in Overman, Redding and Venables (2003) and coverage specific to regional issues in Ottaviano and Thisse (2004), with a review of empirical evidence in Head and Mayer (2004).The first section reviews data and empirical evidence on aspects of the five questions. The second presents a simple system of cities model, which illustrates the basic organization of the urban sector and the interaction between economic and urban growth. The model serves as a platform to discuss issues of institutions and policy. In the third section, the model in Section 2 is adapted to analyze rural-urban transformation and urbanization as part of economic development; then policy issues for developing countries are analyzed.
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