Download Cities and Economic Development

Cities and Economic Development
Robert E. Lucas, Jr.
ASDEQ, Montreal
May 7, 2009
• Sustained growth in living standards–per capita GDP–a phenomenon of the last 300 years, of the Industrial Revolution
• Began in Britain, NW Europe
• Diffused–and is still diffusing–to rest of world
• Gave rise to vast wealth, inequality among nations
Federal Reserve Bank of Minneapolis - The Region - 2003 Annual Repor...
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http://woodrow.mpls.frb.fed.us/pubs/region/04-05/figure2.cfm
2003 Annual Report
World Population
and Production
Figure 1: Income Distribution
Figure 3: GDP Per Capita, Five Regions
Figure 4: Demographic Transitions
Return to: The Industrial Revolution: Past and Future
1/2/2006 11:53 AM
GDP per capita, five regions
18000
1985 Dollars
15000
12000
9000
6000
3000
0
1750
1800
1850
1900
1950
2000
1990 Population in millions
UK, USA, Canada, Australia, New Zealand
354
Japan
124
France, Germany, Netherlands, Scandinavia
184
Rest of Western Europe, Eastern Europe, Latin America
986
Asia (except Japan), Africa
3590
• Industrial revolution mainly an intellectual event
• Matter of creation, diffusion of knowledge, of ideas
• Want to look at nature of this process
• What is the role of cities ?
• No question about statistical relation between urbanization and economic success
• Look at cross-section plot of employment share in agriculture and per
capita GDP (in logs)
• 112 countries, World Bank, 1980
• 9.5 = log(13500),
6.5 = log(665)
AGRICULTURAL EMPLOYMENT SHARES, 112 COUNTRIES, 1980
100
90
EMPLOYMENT SHARE OF AGRICULTURE
80
70
60
50
40
30
20
10
0
5.5
6
6.5
7
7.5
8
8.5
9
LOG GDP PER CAPITA, 1990 DOLLARS
9.5
10
10.5
• Look at historical data (Kuznets, 1971, Economist) on four countries
EMPLOYMENT SHARES IN AGRICULTURE: FOUR COUNTRIES
90
80
India
70
U.S.
60
50
Japan
40
U.K.
30
20
10
0
1800
1820
1840
1860
1880
1900
1920
1940
1960
1980
2000
EMPLOYMENT SHARES IN AGRICULTURE: FOUR COUNTRIES
90
80
EMPLOYMENT SHARE, PERCENT
70
India
60
50
U.S.
Japan
40
30
U.K.
20
10
0
6
6.5
7
7.5
8
8.5
LOG PER CAPITA GDP
9
9.5
10
10.5
• How interpret these relationships?
• Increases in agricultural productivity obviously essential
• Are cities just side-effects of this agricultural success? Places for rich
landowners and their servants to live? Babylon, Athens, Rome?
• Preindustrial cities associated with wealth and, sometimes, high civilization, but not economic growth in the sense of growing living standards for ordinary working people
• On figure, Ancient Egypt, Roman and Renaissance Italy, colonial North
America were pairs (665, 0.85)
AGRICULTURAL EMPLOYMENT SHARES, 112 COUNTRIES, 1980
100
90
EMPLOYMENT SHARE OF AGRICULTURE
80
70
60
50
40
30
20
10
0
5.5
6
6.5
7
7.5
8
8.5
9
LOG GDP PER CAPITA, 1990 DOLLARS
9.5
10
10.5
• All of this changed during the industrial revolution
• Cities of modern world are centers of production
• Think of iron and steel? Manufacturing?
• Better, more basic to think of ideas
• Think of modern city as a collection of educated problem-solvers, engaged in technical, work-related conversations, taking ideas from others, contributing new ones
• Can see signs of this role of cities in data from the postwar WWII,
post-colonial world
• Next figure plots 40 year (1960-2000) annual growth rates of 112
countries against their 1960 income levels
INCOME LEVELS AND GROWTH RATES, 112 COUNTRIES
Annual Growth Rate, 1960-2000
0.06
0.04
0.02
0
-0.02
-0.04
0
2000
4000
6000
8000
1960 Per Capita Income (1990 $)
10000
12000
14000
• Now classify as “open”, “closed” (Sachs-Warner, 1995)
INCOME LEVELS AND GROWTH RATES, 112 COUNTRIES
Annual Growth Rate, 1960-2000
0.06
0.04
0.02
0
-0.02
-0.04
0
2000
4000
6000
8000
1960 Per Capita Income (1990 $)
10000
12000
14000
• Note curve traced out by blue dots: “catch-up growth”, diffusion of
technology from advanced to backward economies
• Note also blue dots far off this curve: Who are they?
16 ASIAN COUNTRIES
0.07
South Korea
Taiwan
0.06
Annual Growth Rate, 1960-2000
Singapore
-- open
-- closed
0.05
Hong Kong
Thailand
Japan
0.04
Malaysia
0.03
Indonesia
Sri Lanka
0.02
0.01
0
0
2000
4000
6000
8000
1960 Per Capita Income (1990 $)
10000
12000
14000
• Countries that still have large traditional agriculture share: Why is
this?
• Technology diffusion is an outcome of thousands of work-related conversations, involving suitably trained people
• All of us in this room are involved in these conversations–this is what
we do all day, every day
• Workers in traditional agriculture are not part of these conversations:
They are spectators, possibly beneficaries, but not contributors, in
development process
• Try to summarize the process of development that these observations
suggest
• Need to think of any economy as two parts: a modern, educated,
urbanized sector, and a traditional agricultural sector
• “Dual economy”
• Prior to the IR, traditional sector was entire economy
• In successful (i.e. OECD) economies today, modern sector is entire
economy
• Traditional economy supports a few wealthy people (owners of land,
oil, etc.) but cannot generate sustained growth in living standards of
working people
• This model continues to describe traditional sectors in world today
• Urbanized sector now comprises almost all of successful economies
(Even agricultural sectors well-educated, high tech)
• Characterized by continuous economic growth, built on idea-generating
urban middle class
• How do these forces balance out, in economies with reasonable governments?
• The rate of growth of an economy’s urban sector depends on two
factors:
— Your own technology relative to the technology in the leading
economies (the higher this ratio the more you learn and the faster
you grow)
— Your ability to process and make productive use of new ideas (the
larger is your educated urban sector, the faster you grow)
• The slow growth economies are
— the very wealthy: they don’t have anyone ahead of them to learn
from
— the very poor: they don’t have the educated class that can make
use of new technology
• The fast growth economies are the middle income economies, which
have
— a world environment with much better technology than theirs, and
— a labor force that can make good use of this technology
• These are ways that a large traditional sector works as a drag on
economic growth
• But there is a feedback affect from growth on the size of the traditional
sector
• As the urban sector gets richer, this acts as a magnet for young,
talented people
• Ambitious 18 years olds in Asia, Africa, Latin America are flocking to
cities that are already large, crowded
• To us in the wealthy world, they may seem to be leaving idyllic surroundings for marginal city jobs or maybe no jobs at all
• But they know what they are doing and if they don’t find a better
life for themselves they are at least increasing the chances that their
children will
• They are seeking places in what V.S. Naipaul calls “the universal civilization”
• Their decisions are the main driving force in economic development