Following World War II, there was a sharp drop in mortality rates in third world countries due to increased health care and better overall living conditions. However, the birth rate remained relatively high, thus creating a rapid population growth during the 1950’s. In 1993, demographers made predictions that by the year 2000, over forty-five percent of the 5.1 billion population of developing countries would be living in urban areas (Oberai, 1993). Due to natural population increase, they further predicted that this great increase in urbanization would occur despite population distribution policies that could possibly be implemented by governments. With this rapid urbanization trend in developing countries, many demographers and economists alike were left asking crucial questions: Why was rapid urbanization occurring? Was urbanization beneficial to the countries experiencing it? While in the beginning of this trend, many people viewed urbanization as a negative occurrence in third world countries, current views have shifted toward a more positive outlook. Many arguments have been made that specifically relate the cause of third world urbanization to economic efficiency.
Prior to the 1980’s, the common view of urbanization was relatively negative. Cities were seen as dirty, full of poverty, and as an overall threat to social betterment (Peterson, 1991). A number of reasons led to society avoiding investment in and migration to urban areas. First, many people believed that cities already benefited from what is referred to as “urban bias.” That is, a disproportionate amount of funding was already being put into urban areas. For example, heavy food subsidies could be found in cities, and larger shares of infrastructure investment were given to urban areas. This left the rural community feeling ignored and, in a way, punished. Many people feared that suppliers in the cities would retain the benefits of investment, and these benefits would never reach the rural community at large.
A second reason why society tended to avoid urban investment and migration was because cities were viewed as being too expensive (Peterson, 1991). Many people did not believe that moving to a city would be economically efficient. In the wake of moving, they would leave behind serviceable housing and other capital, only to reach the city where a large capital investment was needed to accommodate the migrants.
Third, it was believed that cities increased unemployment rates, leading to extreme measures of poverty throughout the city (Peterson, 1991). In the 1970’s, theorists hypothesized that artificial wage increases led to greater in-migration to urban areas, even though there really was not a demand for this labor. Therefore, they saw urban labor supply increasing at a much faster rate than urban labor demand.
Last, another major reason why society tended to view urbanization as a negative occurrence was because of the environmental degradation that resulted (Oberai, 1993). Cities created much congestion, leading to air and water pollution. Large areas of farmland had to be destroyed in order to accommodate urban growth. An indirect consequence of these things was an increase in the number of people who contracted infectious diseases.
Since the 1980’s, a shift has occurred from a negative view of urbanization to a more positive view. The current claim is that rapid urban growth is inevitable and is a natural accompaniment to economic and social progress (Peterson, 1991). There are many arguments for why urbanization has occurred at such a high rate in third world countries over the past five decades and why urbanization is actually a positive aspect of these societies.
Williamson (1991) proposes two hypotheses for why rapid urbanization occurred in the third world countries over the past half century. First, he claims that the large population growth following World War II could not be absorbed by the agricultural sector. There were not enough jobs available in rural areas to support the influx in labor. Thus, migrants were forced to move to cities in hopes of finding urban work. His second hypothesis is that there were unusually strong economic forces “pulling” migrants into cities. It had nothing to do with fewer opportunities in rural areas; rather, it had to do with a greater number of opportunities in urban areas. While the first point may very well be a viable explanation, it is not likely that it accounts for the entire rural-urban shift. Thus, the rest of this paper will focus primarily on the second hypothesis, or the great number of opportunities to be found in and the benefits of living in cities.
First, many theorists focus on the economies of scale that seem to be prevalent in an urban area (Oberai, 1993). Because of the large population in a small geographical area, businesses and industries do not have to spend as much on communication and transportation. They also have access to large and diverse labor markets and other input factor markets, so they can choose the most efficient method of production. Both of these qualities lead to lower costs for firms and businesses, thus leading to greater economic efficiency and productivity in cities.
With this increase in industrial output, there are relatively more high-wage jobs and an increased pace of technological innovation and industrial capital (Oberai, 1993). An increase in technology also increases the productivity of the firm or business, making the urban area a growing center of economic activity. Also as a result of increased incomes, domestic demands shift from food to non-food goods. These goods may include health care, housing, and manufactured goods, all of which will serve to further stimulate modern-sector growth. So, as can be seen, economies of scale allow for a large array of positive economic consequences to occur in cities. A cycle begins to form, whereby each action ultimately leads back to increased economic efficiency and productivity, making cities a positive aspect of economic development in third world countries.
There is also a focus on the efficiency and dynamism of urban labor markets. Urban labor markets are now viewed as more efficient in the allocation of resources than ever before (Peterson, 1991). Therefore, as migration into the city increases, net productivity also increases. This is done by directing the incoming labor force to locations where they can earn higher wages and to where they can make a greater contribution to economic production. Further, more recent studies indicate that there is not a growth in unemployment in urban areas, as was once suspected. This seems to be true because migrants tend to look into job opportunities relatively extensively before they move to the city. They also usually have a large network of friends and family who are willing and able to help them with the move from rural to urban life.
Next, there is an argument that urbanization breeds aggregate output both through short-run efficiency gains as well as long-term growth effects (Williamson, 1991). In the short-run, there is a shift in labor from low to high marginal productivity employment. In the long-run, savings rates are higher in cities, leading to higher accumulation rates in the economy as a whole. Also, because of the capital intensity of city economies, urban growth depends on foreign capital. Thus, the availability of foreign funds may become a significant determinant of urban growth.
There are also arguments that urbanization actually makes the rural sector better off. One hypothesis claims that, as agriculture depends more and more on intensification, there will be a greater demand for urban-based inputs. With this increased demand, urban wages will rise, drawing rural migrants to the city. As a result, rural populations will decrease. With fewer people competing for the jobs, rural wages will then increase. In this way, some theorists argue that migration to cities actually serves to increase rural incomes (Oberai, 1993).
Another argument for the rural-urban linkage claims that a growing population in the city leads to an increased demand for agricultural production. With an increased demand, prices will rise, and the rural sector will see higher incomes. Recent studies have not found any case where the real wages in private-sector manufacturing have increased without a similar increase in agricultural wages as well. In an example from Sub-Saharan Africa, Jean-Marie Cour of the World Bank found that both food production and farmers wages were higher in countries with rapid urbanization (Peterson, 1991).
Urban areas have been found to be centers for entrepreneurial endeavors in many countries. Those people who migrate to the cities tend to be risk-takers and are willing to attempt starting their own business. In this way, the number of businesses in a developing country (both within and outside urban city limits) will grow, leading to an increase in productivity and capital accumulation of this country. Thus, a third world country will begin to move forward toward the status of a developed country. In an example from Bangladesh, a fledgling company was begun with the help of foreign resources. The company thrived, with nearly 130 workers being fully trained by the foreign staff. Within the first seven years of the company’s existence, 115 of the 130 original employees had left to start their own businesses (Peterson, 1991). This entrepreneurial spirit led to substantial increases in exports as well as substantial growth in the Bangladeshi economy.
The idea of cities acting as economies of agglomeration has also led to increased support for urbanization in third world countries recently. This argument contends that communications, transportation, universities, and port facilities are all extremely expensive. These investments can most likely only be afforded by the cities in the developing countries. Because business decisions to invest (both foreign and domestic) often rely on the presence of these things, cities become essential for the economic growth of a country. These businesses will not thrive and grow (and help to increase the economic status of the entire country) without the presence of a large population to support and make their operations profitable (Oberai, 1993).
Urban bias, an issue that used to be viewed as unfavorable when considering urbanization, is now a factor that contributes to a positive outlook for urbanization. All three articles cited in this paper agree that people are moving to cities partly because of the advantages that urban bias present. First, governments may support industries through special tax concessions, subsidized interest rates, tariffs, or other protective measures. This will increase the number of industries and their overall productivity, thus leading to a stronger economy for the entire country. Next, government may also offer direct subsidies for food, health, and educational services, all leading to a higher standard of living for the residents of urban areas. Urban bias may also lead to trade policies, minimum wage laws, and transportation and communication networks, all of which increase both the standard of living and the ability to promote economic growth for the entire country.
Overall, most present-day economists believe that if governments try to implement policies aimed at intervening in the distribution of economic activity in developing countries, they will, in actuality, waste scarce capital resources and slow the economic growth of the nation (Oberai, 1993). As a result, the country will be less able to redistribute income, and less able to decrease poverty. Policies advocating regional balance and urban decentralization should therefore be left until a country has achieved a higher level of development. In the meantime, urbanization will lead to further increases in economic efficiency, and the third world countries will be better off because of it.
A.S. Oberai, "Urbanization, Development and Economic Efficiency", in John D. Kasarda and Allan M. Parnall (editors), Third World Cities: Problems, Policies and Prospects, Sage Focus Editions No. 148, Sage Publications, Newbury Park, California, 1993, Chapter 3, pp. 58-73.
Jeffrey G. Williamson, "The Macroeconomic Dimensions of City Growth in Developing Countries: Past, Present and Future" in Proceedings of the World Bank Annual Conference on Development Economics, 1991, 1992, pp. 241-266.
George E. Peterson, G. Thomas Kingsley and Jeffrey P. Telgarsky, "Rethinking the Role of Urban Areas in National Economic Development" in Urban Economies and National Development, edited by George E. Peterson, G. Thomas Kingsley and Jeffrey P. Telgarsky, Policy Research Series, USAID Washington, D. C., 1991, Chapter 1, pp. 5-21.