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Urbanizationand Economic Development
George S. Tolley
oncerns about urbanizationand economicdevelop_ ment go hand in hand, for a number of reasons.
Beyondthe question of whether urbanizationis a cause
or a consequenceof development,it is the backdropfor
developmentin almost all nations. Rapidurbanization
posescomplexmanagementproblemsin housing, transport, land use, the environment,energy,publicservices,
and finance.These problemsare responsiblein part for
interest in whether overurbanizationhas occurred and
whether more active policiesare neededto control and
direct urbanization. To deal adequatelywith urbanization issues,an understanding is neededofwhy the process takes place and what determines its rate, its geographic pattern, and the characteristics of people in
cities.
That there is a close relation between urbanization
and economic developmentis evident from experience
in most countries that haveundergone development.It
alsoseemsclear that urbanizationis not a primarycause
of economic development.
In a very long view of history the role of cities in
promotingeconomicdevelopment-through beingcenters of the learning and interactions that lead to innovation-would be a concern. In recent history, as
communications have been revolutionized,economic
development has come more to consist in applying
ideas, no matter where they originate.
It seems reasonable that some, and perhaps most,
urbanizationis the result ofeconomicdevelopmentprocesses. But accepting a general line of causality from
economicdevelopmentto urbanizationdoesnot answer
the question of how the causalityworks. Economicdevelopmentmakesit possibleforpeopleto produce more.
Why should this possibilitylead to urbanization?Can
our understanding of the links between development
and urbanization be carried to the point of quantification?What are the main implicationsof a better understanding of urbanization?
In seeking answersto these questions in this chapter
it is recognizedthat the explanationof urbanization is
largelyan explanationof economicactivity.Citieswould
not grow unless there were productivethings for people
to do in them.
In the past hundred years enormousgrowth of cities
occurred in the Western world as peopletook the fruits
of developmentin the form of products, other than food
and fiber, that could be producedmore economicallyin
cities than in the countryside. Rapid urbanization in
developingcountries today is in some part a result of a
similar wish to take the fruits of developmentin the
form of goods and servicessuited to urban production.
But more than in the past, urbanizationappearsto be
relatedto internationalspecializationthat is freedfrom
great dependenceon domesticdemand.Peopleare producing goods in the cities of the developingworld and
trading them in international marketsfor all manner of
other goods,includingfood.Thelinks betweenthe composition of domestic consumption and urbanization
have been greatly weakened.Actually,the links were
never exclusive,and theyhavebecomeprogressivelyless
so throughout the worldwith the increasingimportance
of international trade to all economies.
Domestic and international demands for urban and
nonurban goods, as just discussed, are the basis for
demand influenceson urbanization.The abilityto pro-
Note:KennethMirandaprovidedvaluablehelp in the preparationof
this chapter.
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GeorgeS. Tolley
duce more urban and nonurban goods acts to increase
abundance and is a supply consideration. Population
growth results in growth of human inputs and is likewise a supply consideration. Many of the puzzles of
urbanization can be understoodby analyzinghow these
demandand supplyinfluencesinteract.Thedemandand
supply influencesprovideheadingsunderwhich urbanization is analyzed in this chapter.
A traditional model of urbanization, appropriate to
closedeconomies,is consideredfirst. Relationsbetween
urban and nonurban productivity,incomeelasticitiesof
demand, and population growth as determinants of
urbanization are analyzed.Then urbanization is considered in a more general setting, with international
trade. Attempts are made to distinguish between firstorder and second-order effects for countries that are
price takers in world markets. One of the conclusions
from the resulting model, which is applicableto most
countries, is that greater urban productivityleads to
more urbanization rather than (as in the traditional
model) less. Symmetrically,and again contrary to the
traditional model, greater nonurban productivityleads
to less urbanization.
The model is applied to sixty-sixdevelopingeconomies, leading to explanationsof the degreeof urbanization in each economy in terms of growth in urban
productivity, nonurban productivity, and population.
The use of the frameworkdevelopedin this chapter to
further deepen understanding of urbanization in individual countries is discussed,and some importantpolicy
implicationsare noted.
incomeand the relativeprices ofthe two typesof goods.
These factors are in turn influenced by supply conditions. The total resources of an economyare devotedto
either urban or nonurban activities. The amounts of
output of the two types of activitiesdependon how the
availableresources are split betweenthem and on production considerations that determine how much of
each typeof output can be obtainedfrom a givenamount
of resources.
Overtime the total number of personsworking in the
economy may grow, and for both urban and nonurban
activitiesthe amount of output that can be obtainedfor a
given amount of inputs may increase. Given the increases in the number of persons, in the total stock of
capital in the economy, and in productivities,the responses to the demand and supply changes that occur
during economicgrowth will determine changesin the
allocation of resources between urban and nonurban
activities.
The view that urbanization accompanieseconomic
development implies that the demand and supply
changes are such that increasing urbanization in fact
results. Whyis this, and is it necessarilyto be expected?
The explanationof urbanization has been best explored
for the high-incomeWestern countries which have experienceddramatic declinesin the proportion of people
working in agriculture and in this sense have become
the most fully urbanized. The receivedexplanation of
this result centers on one element on the demandside
and one on the supply side.
Income Elasticities of Demand
Demand and Supply Factors
A first step towardan understanding of urbanization
is to consider the underlying demandand supplyconditions that determine how the resources of an economy
are divided between urban and nonurban activities. A
first approximationis to associate nonurban activities
with agriculture and urban activitieswith industry and
other nonagricultural pursuits. The distinction ignores
nonagricultural production by farmhouseholdsand industry in rural areas, and it begs the question of exactly
how urban is defined-that is, whether smalltowns are
urban or rural and where the dividing line between
urban and nonurban phenomenalies.Althoughthe distinction is not perfect, the discussionhere proceedson
the assumption that some degree of approximationis
inevitableand that nonurban situations in most parts of
the world are overwhelminglyagricultural.
Demand conditionsdeterminehow peoplesplit their
income betweenurban and nonurban products. Important factors in the allocation of income are the level of
The element on the demandside is income elasticity
of demand. Because of the low income elasticityof demand for agricultural products-say, 0.10 to 0.20people are viewedas choosing to spend an increasing
proportion of income on urban products as per capita
income rises. The low income elasticityof demandfor
agricultural products has thus been cited as one of the
principal reasonswhya societydevotesmore and more
of its resources to nonagricultural pursuits and thus
becomes more highly urbanized. Since people must
spend all their income on either urban or nonurban
commodities(where commoditiesare comprehensively
defined to include both consumption goods and the
capital goods on which savingsare spent), the income
elasticityof demand for agricultural (nonurban) commoditiescan be translated into an income elasticityfor
urban commodities.If all incomeelasticitiesare unity, a
1 percent increase in income leads to a 1 percent increase in expenditures on everycommodity. If the incomeelasticityfor some commoditiesis less than unity,
expenditureson them will rise bylessthan 1 percentand
Urbanizationand EconomicDevelopment
the income left over will enable expenditureson other
commoditiesto rise by more than 1 percent.Thus,ifthe
income elasticity for nonurban products is less than
unity, the income elasticityfor urban productswill be
greater than unity.
The balance of income elasticitiesabove and below
unity dependson the relativeamounts ofexpenditureon
each kind of commodity.Awell-knownconditionis that
the expenditure-weightedsum of income elasticities
overall commoditiesis equalto unity. For example,if20
percent of expendituresare for nonurban commodities
and 80 percent for urban commodities,and if the income elasticityof demand for agricultural products is
0.10, then the income elasticityfor urban products is
1.225, implyinga 1.225percent increasein expenditures
on urban products for every 1 percent increase in income. To obtain this result, note that the weighted
income elasticitycondition is w11¶111 + WaT-a= 1, where
the ws are the urban and nonurban expenditureweights
and %1 and q, are the income elasticities. The solution of the income elasticityfor urban products, %, is
(1 - waTja)IWu,
or, with the numbers in the example,
(1 - 0.2 *0.1)/0.8, or 1.225.
The exampleis fora high-incomecountry; a different
result may be obtainedfor a low-incomecountry. It is
generallythought that the income elasticitydemandfor
agricultural productsgoes downas income rises. Thus,
for lower-incomecountries a higher agricultural income elasticity implies a lower income elasticity for
urban commoditiesand hence, other things beingequal,
a lowerrate ofurbanization.Acountry couldstill experience urbanization, but the lower income elasticityfor
urban commoditiesmight contribute to a lowerrate of
urbanization in the early stages of development.
In addition to differencesin income elasticities (the
-qs),another differencebetween high-income and lowincome countries-and one that operates in the opposite direction-is the fractionof expendituredevotedto
urban and nonurban commodities(the ws). If the fraction spent on nonurban commoditiesis high, the weight
on the income elasticityfor nonurban commoditieswill
alsobe high. At an earlystage of development,when per
capita income is low, a large fractionof incomeis likely
to be spent on agricultural commodities. The income
elasticity of demand for agricultural commoditieswill
not be as far belowunity as in a high-incomecountry
and, because its weight is greater, it will tend to make
the incomeelasticityforurban commoditiesonlyslightly aboveunity.
As developmentproceeds,the gradual declinein the
income elasticityfor agricultural commoditieswill act
to increasethe incomeelasticityfor urbancommodities,
while the decline in the agriculturalweight will act to
decrease it. Whether the income elasticity for urban
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commoditiesrises or falls during developmentdepends
on which effect predominates.
It is conceivablethat the income elasticityfor urban
commoditiesis low during the early stagesof development, rises to a peakduringa middleperiod,and fallsat
the later stages. If so, there willbe a tendencyforthe rate
ofurbanizationto start out low,rise to a peak, andfall to
a low rate. The first column of table 2-1 showsvarious
valuesof the incomeelasticityofnonurban commodities
and the second column shows accompanyingpercentages of expenditureson those commoditiesthat might
be observed.The third column shows the income elasticity of demand for urban commodities that results
from these combinations,as derivedfrom the formula
for -9, above.The entries in the table progressfrom the
top row,which correspondsto conditionsthat might be
encountered in the initial stages of development,to
intermediate situations (the middle of the table), to
advanced development(the last row).
In the first row the income elasticityof demand for
agricultural products is at its high value, unity. The
income elasticityof demandfor urban products is then
alsounity, no matter what the expenditurefractionsare.
The income elasticityeffectwould not lead to any relative urbanization, for it would leavethe urban proportion of the population unchanged. In the second set of
entries the income elasticityof demandfor agricultural
commoditieshas fallento 0.8. Some possiblevalues of
the expenditureshare accompanyingthis elasticityare
shown. If the share of expenditureon agriculturalcommoditiesremains high (80 percent),the income elasticity for urban commoditiesrisesto 1.8; it does not riseas
much ifthe expenditureshares are less. In the next set of
entries the incomeelasticityfor agriculturalproducts is
0.5. If the expenditureshare has fallenby this time to 50
percent, the incomeelasticityof demandfor urban commodities will be 1.5, with higher and lowervalues for
different expenditureshares. The last row corresponds
Table 2-1. Determinantsof IncomeElasticity
of Demand for Urban Commodities
Income elasticity of
demand,nonurban
commodities
Income spent
on nonurban
commodities
(percent)
Income elasticityof
demand for urban
commodities
1.0
1.0
0-100
0.8
0.8
0.8
0.5
0.5
80
50
20
1.8
1.2
1.05
50
1.5
20
1.125
01
20
1.225
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GeorgeS. Tolley
to the exampleoriginallygivenfor a high-incomecountry, with an incomeelasticityforurban commoditiesof
1.225.
Table2-1 suggeststhat the income elasticityforurban
commoditieswill first rise and then fall during development. If the share of expenditureon agriculturalcommodities falls only slowly, the income elasticity for
urban commoditiesrises longer and further than if the
share of expenditureson agriculture falls rapidly.
In additionto demandconditionswithin the country,
the proportion ofthe populationwhichis urbanizedwill
be affected by changes in the degree of international
specializationthat occur duringdevelopment.Acountry
may developprimarilyby increasingits output of manufactured goods for export to the rest of the world. If
agricultural output does not increase enough to meet
domestic demand, the exports of manufactured goods
will be used in part to pay for increasing imports of
agricultural commodities.As a result, the increase in
production of urban commoditieswill be larger than if
there were no changes in the degree of international
specialization,and a smaller fraction of the increased
demand for agriculturalcommoditieswill be met from
production inside the economy.The income elasticity
for agricultural commoditiesmust be redefinedto pertain only to the percentage increase in domestic agricultural production associatedwith a 1 percent rise in
income, and increasesin output of urban commodities
will be larger than implied by domestic elasticities.
Changes in the degree of international specialization
may thus accelerate the rate of urbanization during
development.
Changes in international specializationappear to be
the rule and not the exception during development.
Theyhavebeenparticularlypronouncedin such dramatic growth experiencesas the "Pacificgrowth miracles"
in which Hong Kong, Japan, Korea, and Taiwan all
experiencedrapid developmentsimultaneouslywith increasesin output of nonagriculturalgoodsfor export.In
these economies and in others with similar, although
less extreme, growth patterns, concern has arisen over
the loss of agricultural self-sufficiencyas imports of
agriculturalproductsrisealongwith the risingoutput of
the economy. A more positive way of looking at the
decline in agricultural self-sufficiencyis to view it as a
manifestationof gainsfrom internationalspecialization.
It is more economicalto produce manufactured goods
and exchange them for agricultural products than to
forgo the additional manufactured output and try to
produce agricultural products that can be produced
more efficientlyelsewhere.
Although generalizationsare hazardous, historically
economic development has been almost universally
accompaniedby increasingspecializationof production.
Indeed, the very possibilityof economic development
has often been basedon such specialization.Increasing
international specializationis part ofa wider processof
specializationand providesa reason for increasing urbanization that is related to economicdevelopment.
Increasingspecializationcan occur in agriculturalas
wellas in urban production. It is conceivablethat some
countriescould becomeless rather than more urbanized
during development, although no prominent example
comesto mind. A largepart of the internationallytraded
portion of agricultural production comes from highincome countries, which are already highly urbanized.
Growthof domesticdemandand comparativeadvantage
in nonagricultural production are more important in
explainingurbanization than is specializationin international agricultural trade.
Su
pply Factors
Whenattention turns from the demandto the supply
side, concern shifts from changes in output to changes
in the numbers of people used to producethe output. If
human inputs were equally substitutable for physical
capital in urban and in nonurban production activities,
and if the rates of growth of factor productivityin the
two typesof activitieswere the same, changes in output
and changes in numbers of people would go together
exactly, and the demand considerations already discussed would sufficeto explainthe rate of urbanization
during development.But this is not the case.Conditions
vary widely, and output per person in production of
urban commoditiesmay rise more or less rapidlythan
for nonurban commodities.
Traditionalexplanationshave emphasizedrapid technologicalchange in agriculture, which leads to more
rapid growth of output per agricultural worker as the
major supply consideration that acts in conjunction
with low income elasticityof demandto eject resources
from agriculture. Several considerations other than
technological change, however, affect output per
worker, as will now be discussed.
Land scarcity is overrated as a factor that could decreaseoutput per worker in agriculture. If output did go
down, the rate of urbanization would be retarded as
more workers were kept in agriculture to produce a
given agricultural output. This outcome could occur if
growing population pressed seriously against scarce
land supplies,but the evidenceevenforthe prime example of a country that might be in these straits-Chinais unclear.Newlandhas been cominginto productionin
some parts of the world, notably in Latin America. Improvement of the quality of land through investment
Urbanizationand EconomicDevelopment
retards declines in output per worker. International
specializationhas worked against agriculture in many
countries and has easedpressure on land supply.
Agriculturalresearch has effectsoppositeto those of
scarce land supply.An increase in output per worker in
agriculture permitsa givendemandto be metwith fewer
agriculturalworkers,releasespeopleforurban pursuits,
and increases the rate of urbanization.Even if the increase in productivityas a result ofagriculturalresearch
leads to income growth, workers will be released to
urban areas if the income elasticityof demand for the
productswhose output is increasedis lessthan unity, as
seems likely. It is also true that the Green Revolution
and other innovations resulting from agricultural research have sometimes been more saving of land and
related physical inputs than of workers. The effect of
these innovationshas in any casebeen extremelyvaried
among and within countries, so that it is more than
usuallydifficult to generalizeabout it.
Asdevelopmentproceedsthere isa tendencyformore
of the inputs used in agricultureto be producedin urban
areas. This phenomenonis part of the increasing specializationthat has alreadybeenmentionedand appears
to be speeded up by innovations resulting from agricultural research. Gasoline,feed concentrates,and fertilizers and other nutrients are among the inputs produced in urban areas that replace inputs formerly
produced on farms.In addition,home gardenplots and
home food processingdecline.
Successfuleconomicdevelopmentis characterizedby
rising returns to human inputs, resulting in part from
substitution of capital for labor. These changes may
affect urban and nonurban production differently.Urbanizationwill be favoredif the substitution of capital
for labor is higher in nonurban than in urban production-another of the circumstancesthat maydifferfrom
one country to another. A large source of the substitutions is replacementof labor-intensivehuman or animal
sources ofpowerby machinepower,and possibilitiesfor
substitutions abound in nonurban as wellas urban production. (The mechanizationof cotton growing in the
United States had wholesaleeffects on rural-to-urban
migration and profoundly affected American cities.)
Urbanproduction,which uses readilytransferabletechniquesfrom other countries,mayoffergreater possibilities for substitutions, at least in manufacturingindustries. But urban production is more intensive than
nonurban production in services,wherecapital appears
to be less substitutable for labor.
One of the effects of economic developmentis the
gradual elimination of so-calledtraditional production
in both urban and nonurban areas. Urbanizationwillbe
speededif there is more of this traditionalproductionto
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be eliminated in nonurban than in urban areas. Here,
again, countries are not alike. Family and home
businessesabound in many cities, as do small unviable
farming operationsin many parts of the world. (Much
campesinoagriculture is of this type.) The important
characteristicof traditional productionfor the purposes
of this discussionis that, in spiteof all of its adjustments
to relative prices and other changes during development, it is outcompetedby other forms of production.
During economicdevelopmentpeopleare releasedfrom
the declining traditional forms of production to other
activities. If they are releasedfrom traditional employment in urban areas and go into other employmentin
urban areas, there is no effect on urbanization,but if
they are releasedfrom traditional employmentin agricultural areas where there are no expandingemployment opportunities,they willseek employmentin urban
areas, and urbanization will increase.
Because of the low amount producedper person in
traditional production, a reduction in traditional employmentleads to increasedoutput per person.Whether
output per person rises more in urban or in nonurban
areas depends on the rate of reduction in traditional
production in the two types of areas and on its relative
importance in the areas.
Changes in the quality of human inputs through
education and other forms of human capital formation
deserve mention in relation to urbanization.Urbanization and human capital formation both appear to be
responsesto factorsthat lead to economicdevelopment,
rather than urbanization being a primary cause of human capitalformationor viceversa.Likephysicalcapital
formation,human capitalformationresults in increases
in output per person and allowsa given demandto be
fulfilledby fewer people.Giventhe demands for urban
and for nonurban commodities,a higher rate ofincrease
in human capitalper person in nonurban than in urban
productionwill be conduciveto a high rate of urbanization, since the demand for nonurban commoditiescan
be fulfilledby fewerpeople.The increasein educational
levelsand the growthof skilledand professionalcategories of employmentin cities are sometimesthought to
be necessary conditionsfor development.Yet farmers
alsobecomebetter educated.Nonurbanproductionmay
use a loweramount of human capitalper person at the
early stages of development,and the level may remain
lowerthrough a great part of the developmentprocess
even though human capital per person in nonurban
production is continually rising and may indeed be rising at a faster rate than in urban production.The faster
rise in human capital per person in nonurban than in
urban production leads to the hypothesisthat increases
in nonurban human capital could contribute to a high
20
GeorgeS. Tolley
rate of urbanization. This effect,however,may be secondary to the considerationthat both urbanizationand
human capital formation are basically results rather
than causes of economicdevelopment.
Population
The demand and supply considerationsdiscussedso
far pertain to the relativerate of urbanization,or urbanization per capita, and would be sufficient to explain
urban growthin a countrywith stable population.Growing total populationprovidesa kicker to both urban and
nonurban population growth. The rapid population
growthrates in someparts of the world meanthat much
urbanizationcomes simplyfrom the fact that there are
more people in the country.
The TraditionalModel of Urbanization
The discussionhas consideredthe role of the income
elasticitiesof demand in determining urbanization,the
factorsthat affectoutput per person in each sector, and
the role of total populationgrowth. The followingformula bringsthose factorstogetherinto an expressionfor
understanding their combined influenceon the rate of
urbanization.
(2-1)
( / )r1TT - )V + N.
N11(lu"laN 1 /N0 ) + 1
Since the urban populationN,, equalsthe proportion
urban n,, times total populationN (or, N,, = n 1 N), the
percentage change in the urban populationN,, is the
percentage change in proportion urban h41 plus the percentage changein total populationN(or,&N= flu + N),
which is the basis of equation 2-1. The variable on the
left-hand side, N1 , is the annual percentage rate of
growth of the urban population.The first term on the
right-hand side is the percentage rate of change in the
proportion of the populationwhich is urban. It includes
all the considerationsdiscussedearlier exceptthe effect
oftotal populationgrowthof the country,whichis given
by the second term on the right-hand side, N.
Note that the ratio of the percentage increases in
output per capita of urban and nonurban commodities
will be in the ratio of their income elasticities.(Recall
that the incomeelasticitiesare redefinedto take account
of internationaltrade effects.)This firstconditioncan be
writteny,/ya = iu/ %, wherej11 is the percentagerate
of growth of urban output per capita (4u = Y11/N, or
urban output dividedby the country'stotal population)
and r, is the trade-adjustedincomeelasticityof demand
for urban commodities. Similar definitionsapply to Ya
and 9, where the subscript a stands for nonurban
commodities.
Considerations that affect output per person are
brought in by noting that the percentage increase in
output per capita for any commodity is equal to the
percentage change in output per person engaged in
production of the commodity plus the percentage
changein the proportion ofpeoplein the nation engaged
in that production. The secondand third conditionsare
thus ,u = Tu,+ hu for urban commoditiesandy 0 = T0
+ h, for nonurban commodities,where T is percentage
change in output per person engagedin productionand
n is percentage change in the proportion of peopleengaged in production. The second and third conditions
followfrom differentiationof the identity that output
equalsnumber of workerstimes output per worker.The
fourth condition is that any change in the urban proportion of the population must be accompanied by
an equal and opposite change in the nonurban proportion. In percentage terms the fourth condition is k1
= - (NaIN,1 )ia, whereN0 and N11 are the numbers of
persons in nonurban and urban areas. The four conditions that have been given determine the four variablesj11 , Ya,nu, andha0 . The firstterm on the right-hand
side of the above expressionfor the rate of growth of
urban populationis the solution of the set of four conditions for izh,the percentagechange in the proportionof
the populationwhich is urban.
As can be seen from equation 2-1, the numerator of
the term givingthe percentagechangein the proportion
urban is equal to the negative of the rate of growth of
output per person in production of urban commodities
(that is, an increasein urban productivity,acting alone,
leads to a decrease in urban population because the
demand for urban commoditiescan be met by fewer
people) plus the ratio of urban to nonurban income
elasticitiesmultipliedby the rate of growth of nonurban
output per person (growthin nonurban output per person releasespersonsfor urban activities,and the magnitude of the effect depends on the income elasticities).
The denominator-one plus the product of the ratio of
income elasticitiesand the ratio of the numbers of people in urban and in nonurban areas-arises becauseof
the interactions of the various effects.
The secondterm in equation2-1 isN, the percentage
rate of growth of total population of the country. Its
presence indicatesthat when changes in the proportion
of the populationthat is urban are taken into account,
the urban populationvaries in direct proportion to the
number of people in the country.
From the formulait is clear that ratesof urbanization
may differwith conditionsin particular countries.Asan
example consider a country, still at an early stage of
development,in which per capitaincome is rising somewhat rapidly.If the growth is orientedtoward growth of
manufacturingproductsthat are exportedto world mar-
Urbanizationand EconomicDevelopment
kets. the ratio of the increasein urban and in nonurban
output, % I' , willbe rather high-say, 4. Supposethat
one-third of the population is in urban areas and twothirds is in rural areas, sothat the valueforNu/N, is 0.5.
Output per worker in urban areas is assumedto be rising
at2 percent ayear (Tu = 0.02).Asa result of progressin
a commercializedpart of agriculture and the declineof
subsistence agriculture, output per worker in agriculture is alsoassumedto rise at the rate of 2 percent a year
(Ta = 0.02). It is assumed that the total populationof
the country is growingat 1.5percentayear(N = 0.015).
Thevaluesare substitutedinto the formulaforthe yearly
percentage growth in the urban population.
4 0.02 - 0.02
(2-2) N = 4 0.5 + I + 0.015 0.035.
That is, the annual growth rate forthe urban population
is 3.5 percent.
Examplesof much more rapid or of slowerurbanization can be constructedbyvarying the values.The purposeof this section,however,has not beento explainthe
rate of urbanizationfor any one country but to begin to
suggestthe nature ofthe underlyingchangesin demand
and supply that determine urbanization.
A More General Explanation
The discussion points to generalizationsabout why
worldwideurbanizationis occurring.One reasonis that
incomes are rising in many places, albeit in varying
degrees. The higher income elasticity of demand for
urban than for nonurban commoditiesis a fundamental
reasonwhy urbanizationcan be expectedto accompany
economicdevelopmentthroughout the world.
Anotherreasonforworld urbanizationis more closely
related to the nature of the economicdevelopmentthat
is occurring. For much of the world economicdevelopment entailsa transfer oftechniquesof production,and
by and large the techniques are more transferablefor
urban than foragriculturalcommodities.Techniquesof
agriculturalproductionare much more tied to localland
and climate conditions. Efforts are being made to develop and adapt agricultural techniques to suit the
unique conditions ofeach area of each country, but the
pace,at best, is slow.Moreover,agriculture,as an inherent user of location-specificresources, is subject to
intrinisic comparative advantages. Increasing specializationof agricultural production among major regions of the world may be in store.
Urbanproduction, on the other hand, is not nearlyas
location-bound. Factories, machines, and electronics
parts tend to be physicallysimilar the worldover in their
requirements for productiveinputs. It is not surprising
21
that developingcountries are increasinglygetting out of
the agriculturalbusiness and into urban-basedproduction.
Although the model of the preceding section allows
for the effects of trade in the specificationof income
elasticities, it is not fully consistent with the general
reasonsfor rising urban populationconnectedwith specializationin productionnoted above.In equation2-1 a
rise in agriculturalproductivitywill increaseurbanization because a given demand for agriculturalproducts
can be satisfiedby fewer people and the excesspeople
move to the cities. In like fashion,a rise in urban productivityacts to decr:ase urbanization,since fewerpeople are neededto satisfythe demandfor urban products.
The amounts of labor required for production in both
sectors change according to a life of their own, and
amounts of output are not affected by productivity
changes.
Yet one might think that if a sector became more
efficient, it would increase its production,not decrease
it. An increasein efficiencylowersthe price at which a
given quantity can be produced.If the price elasticityof
demand is greater than zero,a loweringof the pricewill
increase the amount that can be sold. A production
response is to be expected.
Indeed,ifthe responsesto changesin productiontake
the form ofadjustments in foreignexportsand imports,
prices are effectivelyset in world markets where de-mands are highlyelasticandwherein manycasesprices
can be taken as given.Even within an economy,a more
adequate view of the differencesbetween urban and
rural production will recognizethat there is not a strict
dichotomy in the types of goods produced.Aside from
local or nontraded goodsin each sector,there are goods
that may be produced in either sector and that can be
traded betweenthe two sectors.There maybe little farmn
output in urban areas (although chickens and garden
plots can be significantin cities), but factoryproduction
and home production of urban-type goods abound in
rural areas,and trade betweensectors in processedfoods
and other commoditiesis commonplace.For most ofthe
world it maybe that most consumptionin either rural or
urban areas is of goods producedwithin each area and
that trade in marketed surpluses of rural and urban
goods is confined to a small part of output, much of
which can actuallybe produced in either sector.
These considerationsof the waytrade occurs suggest
that it maybe more reasonableto take pricesfacingrural
and urban areas as given rather than to take relative
quantity growth as given, as in the model presented
above. If, as a first approximation,prices are taken as
given,productivitychangeswill havethe oppositeeffect
from that impliedby the model.Arise in productivityin
urban areas enhancescities' abilityto competein inter-
22
GeorgeS. Tolley
national markets and to compete with production in
rural areas and thus leads to an increasein urban production, not a decrease.An analogousresult is obtained
in nonurban areas, with the implication that rising
nonurban productivitywill retard urbanization.The results are consistentwith the hypothesisthat urbanization results from changing advantagesin production.
Giventhat a rise in productivityleadsto an expansion
rather than a contraction of sector output, the question
becomeshow great the expansionwillbe. Since relative
quantitiesof output change are endogenousrather than
exogenous, a careful distinction is needed between
changes in average labor productivityand changes in
marginal labor productivityas affectedby diminishing
returns to employment in a sector. If there were no
diminishingreturns as employmentincreasedin a sector, the assumption of given output prices (suggested
here as a first approximation)would implythat, except
by accident, one sector would have a higher marginal
productivityof labor than the other. Migrationwould
then lead to all the employmentbeing in one sector or
the other-one sector would go to zero and the other
would have all the employment.
To avoid this unrealisticsolution the assumptionof
given prices might be dropped, leading to a solution
governedby changing prices of urban goods in relation
to those of nonurban goods.But the ideathat urbanization is primarilyexplainedby massivechangesin prices
of urban goodsin relation to those ofnonurban goodsin particular, by increases in relative prices of urban
goods-is not appealing.This type of change does not
appear to be a pervasiveworld phenomenon. Endogenous relativeprices can be introduced,but it would be
bestto do so onlyafter a situationof givenrelativeprices
has been more fullyexplored.
Another way to avoidthe unrealisticsolution of having all employmentend up in one sector or the other
would be to base a solution on impedimentsto labor
migration. Then a rise in, say, urban comparedwith
nonurban labor productivitywould increasethe attractivenessof urban employment.Imperfectlabor mobility
wouldlead to a rising gapin real incomesbetweenurban
and rural sectors that might be reduced only gradually
over time. Oneproblemwith this solution is that it does
not avoid the outcomethat all employmentends up in
one sector; it only delaysthat outcome.Eventually,over
generations,ifnot earlier,peopleallmigrate to the cities
in responseto relativedifferencesin earningsopportunities. The only reason for not doing so would be nonpecuniary attachments to rural life. Basing an explanation
of urbanization on permanent. nonpecuniary attachments to a wayof life is at least as unappealingas basing
it on changing relative output prices of the sectors.
If one has to choosebetween no labor mobilityand a
degree of mobility that leads to rough equalizationof
opportunitiesfor real earningsbetweensectors, the latter appearsfar more defensible.One is likelyto findthat,
historically,real eamings of comparablelabor in urban
and rural areashavechangedbyabout the same amount,
and the degree of net and gross migration observed
betweenurban and rural areas is so great as to belie the
notion that responsesdo not occur. The single most
important distinguishing feature in the relations between the urban and rural parts of an economymaybe
that they are connected by migration. If one is not to
base an explanationof urbanizationon a growingdisparity between real eamings of comparablelabor in urban
and in rural areas, it is reasonableto supposethat there
is sufficientlabor mobilityto roughlyequalizethe urban
and rural changes in marginal productivitythat occur
during economic development. The implications of
lesser degrees of mobility could be considered,but this
can be done more easilyand with more insightafter the
first approximationis explored.
In distinctionto the variableT that was used aboveto
refer to average labor productivity, let A denote the
influence of nonlabor inputs on the amount of output
(taken to be synonymouswith income produced).For
nonurban production,the availabilityof land maypartly
determineA.Port facilitiesand other natural limitations
could play a similar role in urban production. For both
urban and nonurban production, privatecapitaland the
amounts of various types of infrastructure influenceA.
With laborN measuredin terms of numbersof peopleor
hours, A is influenced by the productive quality per
person, which in turn is determined in part by human
capital investment. For both urban and nonurban production, perhapsthe greatestinfluenceonA is technical
knowledgeused in production, which depends on encouragementof or impedimentsto international transfer of technology, entrepreneurship, incentive structures, and other policyand institutionalconsiderations.
To obtain a formulation consistent with growth
source analysis,take time derivativesof the production
relation Y = AN6 and express as yearly percentage
changes. Then growth in output will equalthe percentage growth in nonlabor influences,A, plus the product
of elasticityof output with respect to labor, e,and the
percentage change in labor. For urban production,
(2-3)
y
+e
aU
and for nonurban production,
(2-4)
A, + N.
The elasticityof output, e, is almost certainly between
zero and one and is closer to one than to zero. If it were
one or greater, the implicationwould be that-other
inputs being held constant-output could be increased
Urbanization
and EconomicDevelopment
23
in equal or greater proportion to increases in labor.
Under the assumptionof fixedproportionsthe elasticity
would be zero. That assumption, however,ignores the
myriadof possibilitiesfor drawingon a givenamount of
nonlabor inputs to producevarying physicalquantities
and qualities of outputs in modern factoryproduction,
officework, retailing, personal services,and traditional
above, E = wnIpy, can be rearrangedas an expression
for the wage in a sector, w = epyIn. With the use of
rates of change for the two sectors,
production as the amount of labor is varied. The relation
(2-6)
Wa = Pa + Ya - Na
assumingthat e is a stable parameter(e = 0). ThePs in
these conditionsrefer to prices of output produced;the
relevant deflatorthat determineslabor supplyresponse
is an index of prices of goods consumed. The level of
prices maydiffergreatly betweenurban and rural areas.
If prices move proportionatelyover time and relative
real earnings in urban and rural areas remain roughly
the same, the rate of growth ofwagesin the two sectors
will be similar, which yieldsthe condition Wu, = Wa.
The right-handsides of equations2-5 and 2-6 can then
be set equal to each other.
If the approximationis retained that changesin prices
of urban-producedgoodsrelativeto those of rural goods
will not in the first instancebe usedas an explanationof
the rate of urbanization,1% = Pa. Then the condition
obtainedfrom setting the right-hand sidesof equations
2-5 and 2-6 equal to each other is
between average labor productivityT in the preceding
section and the influence of nonlabor inputs A in this
section can be seen by combiningthe conditionsT =
YIL and Y= AL' to obtain T = ALE- 1. If e is closeto one
and if nonlabor influencesA are more predominantas
causes of change in averagelabor productivitythan the
elasticityeffectof changes in labor inputsLE-1, then T
and A will move in a similar fashion.
To proceed to the rest of the model in this section,
suppose that labor is paid a wagew that is equalto its
marginal product m multipliedby priceoutput p (or, m
= wlp). The elasticityof output (the marginalproduct
m multipliedbythe amount of laborn dividedbyoutput
y) is seen to be equalto wagepaymentswn dividedbythe
value of output py. This impliesthat e in equations2-3
and 2-4 equalsthe shareof product paidto labor,wn Ipy.
The order of magnitude of e as labor's share can in
principlebe observedrather readily.Althoughthe elasticity of output may be different in urban and in nonur-
ban production, in this example it is taken to be the
same. Not to do so would imply that major relianceis
placedon differencesin factor shares in explainingurbanization.
The rate of urbanization may indeed be affectedby
urban-rural differencesin elasticityof output as well as
by changes in elasticitiesin particular countries. There
are no compellingstudiesthat indicatesystematicdifferences and changes in factor shares, and the shares do
seem in fact to be fairlystable. The formulaforelasticity
of output followedhere thereforeseemsappropriatefor
an overviewof major factors that explainrate of urbanization.
Givenobservedvalues of e, equations2-3 and2-4 can
be used in connection with measurementsof income
growth YandpopulationgrowthNto obtainestimatesof
the growth of nonlaborinfluences,A.Wheneither equation 2-3 or equation2-4 is solvedforA,Ais foundto be Y
minus eN. The estimate of growth of nonlaborsources
of income in a sector is the observedincomegrowthless
that part of income growth attributableto labor, which
in turn is equalto labor'selasticityof output multiplied
by the population growth of the sector.
An essential feature of the model is that labor will
adjust to keep the relativeearnings of urban and rural
employment in line. To incorporate this feature, the
condition pertaining to the elasticityof output derived
(2-5)
and
Wu = Pu + Yu -
-
(2-7)
Nu =
- Na.
This conditionhas the strong empiricalimplicationthatthe excessof the rate of income growth over the rate of
employmentgrowth will be the same in urban and in
nonurban areas. Put anotherway,averagelabor productivity will change by the same proportion in both sectors.
Income produced in the two sectors may change by
greatly differentamounts-that is, Yu,and Ya,may be
very different. The differentialchanges in income produced are a result of differencesin growth of nonlabor
sources of income,which lead to correspondingdifferences in growth of demand for labor. For example,if
nonlabor sources of incomegrowth increasemore rapidly in urban than in rural areas, the demand for labor
will increase more in urban than in rural areas. The
increasein nonlabor sources of incomeand the associated increasein labor inputs willraise incomeby 1, and
employment by some lesser amount, N . Meanwhile,
because of the slower growth of nonlabor income
sources in rural production, Ykwill be smaller than Yk
and NQwill be correspondinglysmaller than N&(owing
to a lessergrowth in demandfor labor in rural areas).If
factor shares and relative wages and prices are not to
change, the rise in ratio of incometo employmentmust
be the same in the two sectors.
How well does the condition stated in equation 2-7,
that averagelabor productivitywill change bythe same
24
GeorgeS. Tolley
proportion in urban and rural employment,fitthe facts?
For sixty-six low- and middle-income economies for
which the requisite income and populationfigures are
availableto study growthrates for 1960-80,the mean of
the excessof the proportionatechange in averageurban
labor productivity over average rural productivity is
- 0.0001.The standard error of this mean is 0.0029.In
these comparisonsreal nonagriculturaland agricultural
incomes are used as surrogates for urban and rural
incomes. It is assumed that employment is roughly
proportional to population, so that urban and rural
populations can be used as surrogates for employment.
Alternatively, still with nonagricultural and agricultural incomes as surrogates for urban and rural incomes, the labor force in agriculture can be used as a
surrogatefor rural employmentand the nonagricultural
labor force as a surrogate for urban employment.Or,
more simply,the comparisonmay be viewedas an application of the model to agriculturalversus nonagricultural employmentrather than to urban versus rural
employment.If agricultural and nonagricultural labor
forces are used, rather than rural and urban populations, the mean of the excess of the proportionate
change in average nonagricultural labor productivity
over that of averageagricultural productivityis 0.0024
and the standard error is 0.0029.
To further test the extent to which equation 2-7 is
satisfied, if the error attributable to the fact that
observedchanges in averageproductivitydo not exactly
fulfill the equation is small, most of the observed
changes in output and employmentwill be explainedby
the model.The smallsizeof the error in relation to total
income or employmentchange is an indication of the
extent to which the hypothesisof equal proportionate
changes ih average labor productivityis fulfilled.
An error-of-fitmeasure, calculatedfor eacheconomy,
is the proportionate annual change in average labor
productivityas a fractionof the mean of annual proportionate urban and rural populationgrowth.The median
of the error-of-fitmeasuresover all sixty-sixeconomies
is 0.030. Two-thirds of the measures fall between
- 0.735 and 0.826. When nonagricultural and agricultural labor forcesare used insteadof urban and rural
populations, the median error-of-fit measure for the
sixty-sixeconomiesis 0.067. Two-thirdsof these measures fall between - 0.981 and 0.828.
The fact that most of the error-of-fit measures are
substantially less than 1 indicates that most of the
observedvariation in output and employmentis associated with growth of nonlabor income sources and the
hypothesizedproportionate changes in labor and that
relativelylittle change is left to be explainedbyerrors or
departuresfrom the hypothesesof the model. The existence of nonzero error of fit may be partly a result of
errors or differencesin the wayvariablesare calculated
from availabledata. The uncertainty of output and employment figures is well known, and the reasons for
differingchanges in measured employmentand output
connectedwith changingmarket orientation ofproduction during developmenthave often been discussed.In
general,more production maypassthrough the marketplaceas economicdevelopmentproceedsover a twentyyear period,but becauseof lagsin data collection,statistics may capture these changes only imperfectly.
Nonzeroerror of fit may alsooccur becauseassumptions of the model that are justifiedas first approximation maynot be exactlyfulfilled.Butthe smallsize ofthe
errors suggests that the principal factors are indeed
capturedbythe model. In viewofall the possiblereasons
for existenceof error, it is fair to say that the data fit the
model well.
It was specifiedthat growth in output can be represented as the sum of labor and nonlabor effectsin each
sector in equations 2-3 and 2-4. Condition 2-7 (for
changes in employmentrelativeto output in eachsector
as migration occurs in response to changes in demand)
was then derived.The model is completedby using the
condition discussed above-that the total amount of
labor used in the economy is the sum of urban and
nonurban labor, or N = N11 + N,. The equation is
differentiatedwith respect to time and dividedby the
original valuesof the variables.The annual proportionate rate of growth of the total populationis expressedas
the product of the urban share of populationand annual
proportionate rate of growth of the urban population,
plus the product of the nonurban share and the annual
proportionate rate of growth of the nonurban population; that is,
2-8'
N FN
FN
(
u
a aThe four-equationmodel given by formulas2-3, 2-4,
2-7, and 2-8 determines the four rates of growth that
pertain to outpyt and employmentin the two sectors,
that is, Y, Ya,N, and NA. To solvefor the variable of
interest-urban populationgrowth,Nu-equations2-3
and 2-4 are substituted into equation 2-7 to eliminate
the Ys.The result is a relation betweenN1u and N1 that
depends on the rates of growth of nonlabor sources of
incomein the two sectors.Therelation can bewrittenNa
= N11 + (A,, - A,,) / (1 - E), indicating that urban and
rural populations move proportionatelyexcept as they
are influencedby differentialchanges in growth of nonlabor sources of income, which havea multiplier effect
of 1 / (1 - e) because under the model enough labor
must be hired to drive the return to labor down to the
same level in each sector. The result for Na is inserted
into condition 2-8 for total employmentand the equation is solvedfor Nk:
Urbanizationand EconomicDevelopment
(F.
(2-9)
N11
+
0
1 -Ael
F.
_
-
ela
-
ThesolutionofthemodelforN
11 givenbyequation2-9
therateofgrowthof
providesthe basisfordecomposing
the urbanpopulationintothreefactors.Thefirstis total
populationgrowthofthenation,N, whichhasa proportionate effecton urbanpopulationgrowth.Thesecondis
an urban productivityfactor that stems from growth of
nonlabor sources of urban production. The positive
effectof increasesin nonlabor sourcesof urban production is enhanced by the multiplier 1 / (1 - e) that is
connectedwith keepingearnings growththe same in the
two sectors, and the magnitude of the effect is also
proportionalto the fractionof the populationin agriculture. Agivenchangein the absolutelevelof employment
as labor is reallocatedwill have a greater proportionate
effect on urban population the smaller is the existing
fractionof the populationthat is urban (which is to say,
the larger the fraction that is nonurban). The third
factor into which urban population growth is decomposed is a rural productivityfactor which stems from
growthof nonlaborsourcesof rural income.It is exactly
analogousto the urban productivityfactor,but it actson
urban populationgrowth with a negativesign, since in
this model a rise in rural productivityincreases rural
population.
Application
the
Sample to
Appicafton to the Sample
Measuresof the rate of population growth N to be
appliedto equation2-9 are readilyavailable.Thefraction
of the population that is not urban, Fa, is availablefor
many countries but may be subject to more error than
total population.Systematicmeasuresof labor'selasticity of output F that are comparableamong sectors and
nations are apparently not available,but impressions
about general orders of magnitude can be obtained.
Althoughthe growth in nonlaborsourcesof income(the
As)cannot be directlyobserved,first-cutmeasurements
can be obtainedwith the use of equations 2-3 and 2-4.
That is, when either equation is solvedforA, the contribution of growth in nonlabor sources of income to
observedincome growthis equalto the observedincome
growth Y minus the product of elasticityof output of
labor F and the growth rate of labor N. (That is, the
nonlabor source of income growth is total income
growth minus the contribution of labor to income
growth.)
The calculationsjust describedgiveonly first-cutor,
at most, suggestive measurements of the As because
they ignore the stipulation of the model that average
labor productivityrises at the same rate of growth in
both sectors. The measures are dependent on the esti-
25
matesof growthof urbanand ruralincome,whichmay
be subject to great measurement errors and possible
in definition.Tominimizethe effectsof
inconsistencies
measurementproblems,the procedureusedhere is to
averagethe changesin incomein the two sectorsand
thus obtainincomemeasuresthat conformto the productivitycondition.Specifically,
the averageexcessof
the rate of growthof income in eachsector overthe rate
of populationgrowth in each sectoryieldsan estimate of
the common risein averagelabor productivityin the two
sectors. This estimate made on the basisofthe observed
averagefor the two sectors can be added to population
growth in each sector to obtain the measuresof income
growth in the sectors that would prevail if the model
fitted the real situation precisely.After this attempt to
purge the income measurementsof error and to eliminate the effectsthose errors would spuriouslyintroduce
into estimates of the factors that affect urbanization,
estimates of the As may be obtained as before by subtracting the product of labor elasticityof output and the
amount of labor from the incomevaluesthat conformto
the averagelabor productivitycondition.
Table2-2 presentsthe results obtainedwhenthe model is appliedto sixty-sixlow- and middle-incomeeconomies, using urban populationstatisticsfrom the World
Bankand an estimateof labor'sshare Fof 0.7. Column1,
the annual proportionategrowth of urban populationin
each economyfrom 1960to 1980,is the variable to be
explained. Column 2 is the average fraction of the
populationthat is urban for 1960-80. This fractionwas
calculatedto conformto equation2-8, whichrelatesthe
rates of urban and rural populationgrowthto the rate of
growth of the total population. The fraction of the
populationthat is rural, F,, is 1 - F,,. Arrangementof
equation2-8 as an expressionforF givesas the fraction
of the populationthat is urban F, = (N - Na) I (Nu
1 Na), the ratio between the excessof total population
growthover nonurban populationgrowthand the excess
of urban over nonurban populationgrowth. This measure is quite closeto the simple averageof the 1960and
1980 values for the fraction of the population that is
urban, and in all cases it lies betweenthose values.The
methodjust describedfor calculatingF
1 1 in conformance
with equation 2-8, along with the method described
above for calculating the growth of nonlabor income
sourcesA to conformto equations2-3 and 2-4, ensures
an internallyconsistent system of accounting in which
the factorsthat explainurban populationgrowth exactly
add up to urban population growth. Although other
procedures for defining variables might have given
about the same results, the proceduresused here have
the advantageofeliminatingidiosyncraciesin definition
as a perceivedreasonfor differencesin rate of urbanization. The analyticfactorsthat explainurban population
26
GeorgeS. Tolley
Table 2-2. UrbanPopulation Change,Sixty-six Economies, 1960-80
Economy
Annual proportionate
change
in urban
population,
Nu
(1)
Anmualpro- Annual proportionate portionate
Urban
growth in
growth in
share
urban nonnonurban
of populalabor
nonlabor
tion, 1980, sources of
sources of
Fu
income, Au income, A,,
(2)
(3)
(4)
Componentsof change
in urban population
Annualpro- Urbanproportionate ductivity
changein
factory
total popuF,A&I
lation,N
(1 - e)
(5)
(6)
Nonurban
productivity
factor,
Error of fit,
-FaAal
(Au - A,)!
(I- E)
'/2 (u +X
N)
(7)
(8)
Bangladesh
Ethiopia
Mali
Somalia
Chad
Burma
BurkinaFaso
India
0.066
0.070
0.054
0.052
0.067
0.039
0.045
0.032
0.076
0.099
0.151
0.231
0.118
0.228
0.068
0.199
0.006
0.016
0.016
-0.025
-0.010
0.019
-0.001
0.019
- 0.007
0.001
0.005
- 0.036
-0.026
0.012
-0.010
0.015
0.027
0.024
0.024
0.024
0.020
0.022
0.016
0.022
0.017
0.048
0.045
-0.065
-0.030
0.048
-0.002
0.051
0.022
-0.002
-0.015
0.093
0.077
-0.030
0.032
-0.041
- 0.413
-0.171
0.196
1.527
-1.101
- 1.193
0.828
0.567
Malawi
Rwanda
0.070
0.062
0.062
0.029
0.028
0.018
0.016
0.007
0.029
0.027
0.089
0.059
- 0.049
- 0.024
- 0.249
- 0.096
Sri Lanka
Guinea
Zaire
Niger
Benin
Pakistan
Tanzania
Central AfricanRepublic
Haiti
Mauritania
Lesotho
Uganda
Sudan
Togo
0.041
0.061
0.060
0.070
0.044
0.041
0.072
0.051
0.055
0.128
0.067
0.223
0.141
0.242
0.091
0.119
0.249
0.080
0.315
0.247
0.102
0.033
0.019
0.013
- 0.006
-0.001
0.007
0.030
0.023
0.007
0.004
0.009
0.039
0.012
0.002
-0.021
- 0.014
0.001
0.025
0.009
-0.005
-0.012
- 0.025
0.025
0.021
0.029
0.023
0.031
0.027
0.029
0.028
0.022
0.016
0.026
0.021
0.050
0.038
- 0.016
-0.003
0.021
0.074
0.070
0.017
0.009
0.026
0.126
-0.030
-0.006
0.053
0.042
-0.004
-0.062
- 0.026
0.012
0.030
0.076
- 0.080
-0.315
-0.190
-0.176
-0.554
0.633
0.442
0.004
- 0.747
- 1.060
- 0.313
0.969
0.077
0.080
0.006
- 0.008
0.034
0.018
0.026
- 0.724
0.070
0.053
0.166
0.132
0.003
0.034
- 0.013
0.025
0.024
0.026
0.009
0.098
0.037
- 0.071
-0.027
0.671
Kenya
0.070
0.101
0.017
0.005
0.035
0.051
- 0.016
- 0.246
Senegal
Indonesia
Egypt
Ghana
Honduras
0.029
0.035
0.031
0.049
0.054
0.240
0.174
0.415
0.292
0.292
0.010
0.037
0.037
-0.001
0.017
0.008
0.031
0.033
-0.011
0.007
0.025
0.101
0.073
-0.002
0.040
- 0.021
-0.087
-0.065
0.025
- 0.017
- 0.538
0.826
1.046
-0.735
-0OA73
- 1.449
0.025
0.020
0.022
0.026
0.032
Zambia
0.054
0.301
0.019
0.008
0.029
0.045
- 0.020
Thailand
0.033
0.135
0.046
0.045
0.029
0.133
-0.129
Bolivia
0.042
0.284
0.025
0.018
0.026
0.059
- 0.043
- 0.030
Philippines
Congo
Nigeria
El Salvador
Morocco
Peru
Cote d'lvoire
Nicaragua
Colombia
Paraguay
DominicanRepublic
Guatemala
SyrianArab Republic
Malaysia
Jamaica
Korea,Republicof
0.038
0.028
0.047
0.036
0.044
0.047
0.080
0.043
0.045
0.031
0.055
0.037
0.047
0.036
0.034
0.056
0.330
0.350
0.163
0.395
0.348
0.567
0.278
0.470
0.593
0.375
0.402
0.360
0.434
0.270
0.419
0.410
0.032
0.004
0.024
0.022
0.021
0.027
0.032
0.041
0.040
0.034
0.032
0.035
0.048
0.042
0.015
0.064
0.028
0.001
0.016
0.020
0.013
0.014
0.018
0.034
0.026
0.032
0.019
0.031
0.040
0.039
0.005
0.047
0.029
0.023
0.025
0.033
0.027
0.028
0.045
0.031
0.026
0.027
0.029
0.028
0.032
0.028
0.015
0.022
0.071
0.008
0.066
0.043
0.045
0.039
0.077
0.073
0.054
0.071
0.064
0.075
0.091
0.103
0.029
0.125
- 0.062
- 0.002
- 0.045
-0.040
- 0.028
-0.020
-0.042
- 0.060
-0.035
- 0.067
- 0.037
- 0.066
-0.076
- 0.095
- 0.010
-0.092
0.009
1.138
1.500
0.495
0.260
-0.149
0.009
-0.494
- 1.148
0.077
0.044
- 0.057
-0.384
0.652
-1.283
0.334
1.101
Urbanizationand EconomicDevelopment
27
Table 2-2 (continued)
Economy
Annual proportionate
change
in urban
population,
N,,
(1)
Annual pro- Annualproportionate portionate
Urban
growth in
growth in
share
urban non- nonurban
of populalabor
nonlabor
tion, 1980, sources of
sourcesof
F,,
income,A. incomne,
A.
(2)
(3)
(4)
Componentsof change
in urban population
Annualpro- Urbanproportionate ductivity
change in
factor,
total popuFaA]u
lation,N
(1 - e)
Nonurban
productivity
factor,
Error of fit,
- FaAal
(Au- a,)/
(1 - e)
1N2
W +a)
(5)
(6)
0.025
0.030
0.075
0.004
-0.053
0.031
0.301
- 0.195
0.033
0.030
0.024
0.019
0.030
0.028
0.008
0.014
0.003
0.010
0.039
0.060
0.061
0.022
0.067
0.062
0.009
0.021
0.070
0.091
-0.025
-0.046
-0.046
-0.014
-0.059
- 0.045
-0.007
-0.016
-0.055
- 0.071
0.122
0.012
1.408
-2.719
0.276
0.260
-5.082
-0.914
5.940
0.430
- 1.436
(7)
Turkey
Algeria
0.047
0.065
0.383
0.452
0.036
0.002
0.026
- 0.017
Mexico
Panama
Taiwan
Chile
CostaRica
Brazil
Uruguay
Argentina
Portugal
Yugoslavia
0.046
0.044
0.038
0.028
0.038
0.046
0.010
0.019
0.018
0.030
0.592
0.475
0.680
0.749
0.400
0.556
0.821
0.782
0.269
0.348
0.029
0.034
0.057
0.027
0.033
0.042
0.016
0.029
0.029
0.042
0.018
0.026
0.044
0.016
0.039
0.030
0.011
0.022
0.023
0.033
Venezuela
0.044
0.756
0.042
0.029
0.034
0.035
- 0.024
HongKong
0.023
0.895
0.044
0.042
Greece
0.024
0.526
0.054
0.042
Spain
0.024
0.658
0.048
0.037
Israel
0.039
0.836
0.050
0.037
Note:Economies
arelistedin increasing
orderof1978percapitaincome.
0.023
0.015
-0.015
0.006
0.085
-0.066
0.011
0.055
-0.042
0.031
0.027
- 0.020
growthin fact add up exactlyto measuredurban population growth.
Columns 3 and 4 present measures of the average
annual rate of growth of the sourcesof nonlabor urban
and nonurban income A, with the use of the purged
income values, as describedabove.
The key columns are 5, 6, and 7. They show the
decomposition of the annual proportionate urban
population growth given in column 1 into the three
terms in equation 2-9. Thus, column 5 is the annual
proportionate overall population growth of the economy, which makes a direct and equal contribution to
urban population growth. Column 6 is the urban productivityfactor,whichgivesthe effectofnonlaborurban
income source growth on the rate of urban population
growth.Column 6 is column 3 multipliedby the nonurban fractionof the population(calculablefrom the table
as 1 minus the urban fraction in column 2) and divided
bythe share of incomethat accruesto factorsof production other than labor, 1 - e (in this case, 1 - 0.7, or
0.3). Column 7, the nonurban productivityfactor, is
calculatedfrom column4 in the sameway as the urban
productivityfactor is calculatedfrom column 3, except
that the sign is changed, since nonurban productivity
acts in the oppositedirectionfromurban productivityas
an influence on the rate of urbanization.
(8)
2.877
-0.601
0.894
- 0.642
Column 8 presents the error-of-fitmeasure for each
economy.As discussedearlier, that measure is the differencebetweenurban and nonurbanaverageproductivity change (basedon observedincome) dividedby the
averageemploymentchange in the two sectors. A positive sign indicatesa greater urban than nonurban average increasein labor productivity,using observedmeasures of income;a negativesign indicatesthe reverse.A
value of less than one in absolute terms indicates that
relativelymore of the employmentchanges are associated with the factorsexplainedby the model than with
failureto satisfyexactlythe proportionateproductivity
condition.The effectof the error is smallerthe closeris
the value to zero.
Column 5, proportionate total population growth,
shows, as expected, that total population growth
accounts for a rate of urbanizationthat is generallyon
the order of 2 percent a year (0.020,as a decimalfraction, as expressedin the table). It rangesup to 3 percent
in some casesand for certain economies,such as Yugoslavia, is very low. The direct effects of population
growththus cannot account for the high ratesof urbanization-up to 7 percent-which are found in the table.
Populationgrowth could alsocause pressure on limited
agriculturallandsuppliesand forcegrowingnumbersof
peopleto seek work in urban areas.This effectwould be
28
GeorgeS. Tolley
manifested in a resource scarcity situation in which
suppliesof nonlaborresources were more expansiblein
urban than in rural areas. If nonlaborresourceswere as
scarce in urban as in rural areas, in the sense of having
an elasticity of supply that is zero or equally small,
nonlabor inputs would tend to increaseby similar relative amounts in both rural and urban areas and there
would be little impetusto urbanization.In a situation in
which limited supplies of land providedthe major impetus to urbanization,one would expectto see limited
increasesin nonlaborsourcesof income growthin rural
areas, coupledwith larger increases in labor inputs in
urban areas as the supply of urban sites with associated
infrastructure and other urban facilities expanded to
accommodatepeopledisplacedfrom agriculture. These
endogenous increases in urban nonlabor inputs would
be greater than the increases in agricultural nonlabor
inputs, but if the only important impetus to urbanization were displacement of agricultural labor, the increases in urban nonlabor inputs still might not be
great, since in this depictionof the world more vigorous positive impetuses to economic developmentare
lacking.
One might suppose that economieswith less than 1
percent a year growth in agricultural nonlabor inputs
may have a land scarcitysituation. In table 2-2 twentyfiveof the sixty-sixeconomieshave growth of nonlabor
sourcesof nonurban income ofless than 1 percent a year
(or, as a decimalfraction,0.010)as indicatedin column
4. Of these, ten experiencednegativerates of change in
nonlabor sources of income,which indicatesretrogression and other specialfactorsnot explainedby the usual
land scarcitysituation. Note that land scarcity doesnot
implynegative growth of nonlabor sources of income
but rather no growth or a very small increase. The
economieswith low and negative growth for nonlabor
sources of nonurban income tend to be among those
with the lowest incomes, as indicated by their early
appearancein the table. (Economiesare ranked by 1978
per capita income.)It is also true that these economies
generally have high urbanization rates. In the five
lowest-incomeeconomies (Bangladesh,Ethiopia, Mali,
Somalia,and Chad)rates of changefor nonlaborsources
of rural income are negative or less than 1 percent a
year. Each had a rate of growth of urban populationof
over 5 percent a year (0.050, as a decimal). Of the
twenty-fiveeconomieswith low or negative growth of
nonlaborsourcesof rural income,only three-Senegal,
CongoandJamaica-had an urbanpopulationgrowthof
less than 4 percent a year. Bycontrast, in only twentyof
the forty-one economies where growth of nonlabor
sourcesof rural incomewasgreater than 1 percentwere
annual rates of urban population growth more than 4
percent.
The apparent tendencyfor high rates of urbanization
to be associatedwith low rates of growth of nonlabor
rural income sources does not prove that land scarcity
has been a highly important reason for rapid urbanization. Amore likelyexplanationof the findingmaybe the
general sluggishness of agriculture in the twenty-five
economiesand a general failure to advanceknowledge
or introduce new techniques-in short, a failureof nonland conventional and nonconventional inputs to increase, even though land supply may havebeen elastic.
Lackof inputsother than landmayhaveactedto depress
the marginal productivity of labor and hence the demand forlabor in rural areas. Ifso, it is a lackof effective
economic developmentin agriculture and not a lack of
land.that helpedto fosterhigh urbanizationratesamong
the countries that experiencedlow rates of growth of
nonlabor rural income sources.
The interpretation of eventsin terms ofa more general economic developmentperspectivethat goes beyond
preoccupation with the role of agricultural land is
strengthened by consideringadditionalresults in table
2-2. One of the striking relations in the table is the
positiveassociationbetween growth rates of urban and
rural nonlaborsourcesof income,as revealedbylooking
down columns 3 and 4. The two series have a simple
correlation coefficient(R2) of 0.964. Tworeasons may
be noted for the positiveassociation.First, the nonlabor
incomesourcesincludecapital,which is mobilebetween
sectors. Increasesin the capitalstockof an economywill
tend to be allocatedamong sectors so as to equalizethe
marginal returns to capital and impart changes in the
same direction to nonlabor income sources in the different sectors. Second,and perhapsmore important, the
nonlaborincomesourcesreflectmore generaleconomic
developmentchanges, in addition to conventionalinputs, that act to increasethe productivityof the conventional inputs. There is some tendencyfor the effectsof
economicdevelopmentchanges to be pervasive;for example, the influenceof research, infrastructure, incentivestructures, and institutionstends to be felt throughout an economy.Just as there is a tendencyto equalize
returns to conventionalinputs among sectors, there is
some tendencyto equalize returns to deeper economic
developmentefforts, even though the latter tendency
maybe less perfect.The fact that the economiesin table
2-2 which have low rates of growth of nonlabor rural
income sourcesalso tend to havelow rates of growthof
nonlabor urban income sources suggests that general
economic developmentdifferences,and not primarily
agriculturalland, are at work in explainingthose economies' high rates of urbanization.
An ancillaryfindingin table 2-2 is that the growthin
nonlabor sources of income tends to rise with the per
capitaincome ofthe economy(whichis to say, it risesas
one looks down the table). The simple R2 betweenthe
income rank of an economy(asindicatedby its order in
Urbanizationand EconomicDevelopment
the table)andthe urban nonlaborincomesourcegrowth
rate in column3 is 0.658.The simpleR2 betweenincome
rank and the rural nonlabor incomesource growthrate
in column 4 is 0.642. The findingreflectsthe tendency
among these economiesfor the more affluent among
them to gain in relation to the less affluent.
To return to factors that affect the rate of urbanization, it is noteworthythat when columns3 and 4 oftable
2-2 are compared,for every one of the sixty-sixeconomies the growth rate of urban nonlabor income
sources is greater than that for rural nonlabor income
sources.This findingis consistentwith the hypothesis
noted earlier, that the techniques of urban production
are easier to transfer among economiesthan those of
agricultural production. Since an excessof urban over
rural nonlabor income source growth acts to foster
urbanizationin this model,the rate of urban population
growth is greater than the rate of overall population
growth for every one of the sixty-sixeconomies.
A final considerationin interpreting table 2-2 is the
role of the fraction of the populationwhich is urban. If
this fraction is small, any differentialchange between
urban and rural nonlabor income source growth has a
magnifiedeffecton urban population.The reasonis that
a given absolute change has a greater percentage effect
on a smallnumber than on a largenumber. Thiseffectis
reflectedin equation 2-9, in which the coefficientFa /
(1 - e) multiplies the growth rate of nonlabor income
source to arrive at the urban and rural productivity
factors.Thus,economieswith large nonurban fractions
in their populations tend to have greater urbanization
rates. Since these economies generally have low per
capita incomes, they are the ones that have predominantly experiencedthe highest urbanizationrates.
Progressing down the table to increasinglyhigherincome economies, one finds that the difference between urban and rural nonlabor income sourcegrowth
stays about the same or becomes larger, but the contributions of the urban and rural productivityfactors
decreasebecauseof the decliningvalueof the multiplier
Fa I (1 - E). SinceFa = 1 - Fu, the multiplierwill be
greater than one if the fractionof the populationthat is
urban is greater than the share of incomethat accruesto
labor. The condition would be fulfilled for all but a
handful of the economies,regardlessof the value of e,
but the multiplier falls more and more toward one
toward the bottom of the table. The rates of growth of
urban population decline until they are not much
greater than the rate of overallpopulationgrowth.This
is shownin equation2-9, which givesan analyticexplanation for the descriptivefindingof the associationbetween the fraction that is urban and the growth rate of
urban population.
The analysispresented here of factors that affecturbanization was carried out for three other cases: a
29
population analysis in which labor share, E, is 0.5 instead of 0.7;and two labor forceanalysesthat use nonagricultural labor force as a surrogate for urban labor
force,with e at 0.7 in one caseand 0.5 in the other. The
results were essentiallysimilar to those presentedhere.
The existence of many variations from the general
patterns that havebeen discussedindicatesthat conditions in individual economies-playa part in urbanization. India and Burmaare among the economieswhich
stand out particularlyas exceptionsto some of the patterns in table 2-2. Both rank low in per capita income
and havehigh nonurban proportionsof population,yet
unlike most other economieswith these characteristics
theyhaverelativelylowurbanizationrates. Growthrates
of urban and rural nonlabor incomesources are largely
offsettingin these two countries. The size of the Indian
economymight influencethe result, but this consideration would not apply to Burma.
India and Burma are only two examplesthat indicate
the usefulnessof more analyticwork for understanding
patterns of urbanization.For any one of the economies,
more detailedanalysiscould be undertaken, with more
refined identificationof the factorsthat affecturbanization as an object.
Further comparativeanalytic work to contrast and
understand differences among regions and different
types of economiesis recommendedto strengthen the
knowledgebasefor predictionandpolicyconcernedwith
economicdevelopment.Further workshould giveattention to differencesin industrialstructure and to considerations that affect trade. Greater detail on types of
goods could be included, as could allowancefor price
effects, age composition, education, dependency,and
other considerationsbearingon workparticipation.The
assumption that the number of workers in urban areas
goes hand in hand with the population of these areas
would be modified.
Conclusion
This chapter suggests that the degree to which a
country succeeds in fosteringgrowth of urban productivity is likelyto be the major determinant of its urbanization. Populationgrowthwill continue to be a source
of both urban and nonurban growth.Countriesthat lag
in growth of agricultural productivitywill experience
added urbanization pressures.
As important as these general findingsis the usefulness of the frameworkof this chapter as a basis for
quantifyingthe experienceof individualcountries.Prediction and planning are enhanced, and the economic
factors that influencethe effectivenessof policiesconcerned with urbanization can be better understood.
30
GeorgeS. Tolley
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