1
An Overviewof UrbanGrowth:
Problems, Policies,and Evaluation
George S. Tolley
Vinod Thomas
The
world has been urbanizing rapidly for a long
T time and shows everysign of continuing to do so:
more than 40 percent ofthe world'spopulationtodayare
urban dwellers.Dramaticurbanizationoverthe past two
or three decadeshas been concentrated in the developing countries, where the urban population has been
expandingat twicethe rate observedin the countryside.
In fact, the world'sbiggestcitieshave increasinglybeen
in the developingnations, and population concentrations in such urban centers as MexicoCity,Sao Paulo,
and Shanghai have reached extraordinarylevels.
The rapid growth of cities and their large sizes notwithstanding,the urban share oftotal populationin the
developingcountries as a whole is less than one-third,
compared with more than three-fourths in industrial
market economies. Furthermore, the current pace of
urbanization in developing countries is not unprecedented: the urban population in some of today's
advancedeconomies grew even faster in the past. The
differencelies in the much larger absolutesizes of a few
cities and of urban agglomerationsin the developing
countries today. The urban populations constitute a
relativelylowshare of the national totals, however,as a
result of significant population increases from large
bases in the rural areas.
Whether or not the current pattern of urbanizationin
developingcountries is alarming when viewedfrom a
historical, spatial, and cross-country perspective, it
greatly concerns most governmentsin those countries.
Consequently,some countries followpoliciesintended
to slow down urban concentration and even reverse
rural-to-urbanmigration. Somemeasures-such as the
creation of new cities and the discouragementor pro-
hibition of further industrial concentration-are intended to decentralize economic activity from large,
congested urban agglomerations.The stated objectives
includethe needto reduce the economicand managerial
costs of overcrowdingand improve regionaland urbanrural income distributions. At the same time, other
economic policies-for example, credit subsidies, import protection, and urban food subsidies-more often
than not indirectly promote urban concentration.
Awarenessof such effects has prompted some policymakers to reconsider these implicit spatial policies.
This volume is a response to the increasing preoccupationwith urbanization in developingcountriesand
to the associated policy issues. In part, the book is
concerned with an understanding of why and how urbanization occurs. An examination of the patterns of
urbanization among countries and over time puts in
perspectivethe more recent developing-countryexperiences and brings out similarities in urbanization in
differentcountries during economicdevelopment.Explanations of the processes of urbanization are also
essentialto better appreciatethe benefitsand costsconnectedwith those processes.These concerns are linked
to another goal of the book, an evaluationof urbanization policies.Policyinitiativesthat attempt superficially
to counter deep-rooted urbanization trends can be
costly;policiesto addressthe underlyingcausesof concem and ameliorate urban (as well as rural) problems
directly can be beneficial.
Linn (1983)and Renaud (1981)havemade important
contributions in this area. Renaud comparesmacroeconomic, urbanization,andinterurban policiesin developing countries with those in the developedcountries and
1
2
GeorgeS. Tolleyand VinodThomas
discusses the need to correct the undesirable spatial
effects of national economic policies, make internal
management of cities more efficient,and increase economic efficiencyby eliminating barriers to mobilityof
resources and dissemination of innovations. Linn focuses in greater detail on intraurban issuesand on how
to increase the efficiencyand equity of growing cities.
He coversa wide range of areas-urban employment,
income distribution, transport, housing, and socialservices-and evaluates the effectivenessof such policy
instruments as public investment,pricing,taxation,and
regulation.
This study focusesmore sharply on the policyissues
connected with concentration and decentralization.
Evaluation methods and quantitative assessments of
policy effectshave been drawn from the experiencesof
different countries. The book complements the more
general urban review of Renaud and the city-specific
findingsof Linnin that it seeksto sharpenthe economic
analysis and evaluation of urbanization policies at the
national and city levels.A unique aspect of this book is
its attempt to deepen our understanding of the economic benefits and costs of urbanization and urban
policyinterventionswithout denyingthe contributionof
other disciplinesto an understanding of urbanization.
Patterns of Urbanization
In comparisons of urbanization it must be kept in
mind that countries do not report their urban populations uniformly. The reasons for nonuniformity range
from use of differentcriteria in defining urban areas to
differencesin conceptsand in the accuracyof statistics
among countries. Furthermore, global data for the
urban sector usually gloss over important intraurban
differencesamongcountries, includingvariations in the
definition and nature of large as against small cities.
Statisticson urbanizationshouldthereforebe usedwith
caution and perhaps only for broad comparisons.
Historical Comparisons
Someargue that developing-countryurbanizationtodayis qualitativelydifferentfrom the historical pattern
in today'sdevelopedcountries. The main differencerelates to the absolute levelsof urbanization today,which
in good measure are basedon large overallpopulations.
High levels of absolute povertyare also associatedwith
urbanization.During 1970-82 the developingcountries
experienceda more rapid urbanization than did the
industrial countries (table1-1).Theorders ofmagnitude
are even more striking between 1950 and 1980,when
the urban areas of the developingcountries (excluding
China)absorbednearly 600 million additionalpeopletwice the total number of urban dwellersin industrial
countries at the beginning of that period.'
If the recent trends continue, an additional 1 billion
urban dwellersmaybe added in developingcountries by
the end of this century.The magnitudesare historically
unique. Unprecedentedconcentrationof peopleis likely
to prevail in several cities in the developingcountries
which are alreadyamong the biggesturban agglomerations in the world. Accordingto U.N.projections, Mexico Cityand Sao Paulo each may contain more than 25
million people by 2000, closelyfollowedby Shanghai,
Beijing,and Riode Janeiro; of the twenty-fivecitiesthat
are likelyto have more than 10 million people,twenty
are expectedto be in what are now considereddeveloping countries. The magnitude of this growth is likelyto
compound the problems of managing cities and of
addressing absolute poverty and unemployment.
Although the sheer magnitude of urbanizationandof
associated problems in developingcountries is phenomenal, some other salient aspectsof the present urbanization pattern do not depart markedly from past
experience.A comparison of trends over many years
revealsno dramatic changes in the growth rate of the
world's urban population. The share of the world's
population in urban areas has increasedsteadily,from
an estimated3 percent in 1800to more than 40 percent
today, but the percentage change per decade in the
Table 1-1. UrbanPopulation: Share and Growth, by Country Group
(percent)
Urbanpopulation
as share of
total population
Country group
1960
1982
Averageannual
growth in urban
population
1960-70
Averageannual
compound
growth
in urban share,
1970-82
1960-82
Low-income
17
21
4.1
4.4
Middle-income
33
46
4.4
4.2
Industrial market
68
78
1.9
1.3
Industrial nonmarket
48
62
2.6
1.8
Source:WorldBank(1984),annextable22, p. 260;the lastcolumnis derivedfromthe firstfour.
1.06
1.67
0.69
1.29
An Overviewv
of UrbanGrowth
proportion that is urban has remained around 16 percent during this period.2 Asseen in table 1-1the developing countries today are adding to their urban populations more rapidlythan are the developedcountries, but
these rates are not very unlike those observedduring
earlier periods of urbanization in what are now developed economies. Hence, the long-term processes
under way are not totally surprising.
Comparisons among Countries
Behind the total figures on urban population lies a
variety of individual country experiences.LatinAmerica
is by far the most urbanized among the developing
regions; some two-thirds of its populationlive in urban
centers. In contrast, low-income Asia and Africa are
predominantlyrural, with averageurbanization levelsof
25 percent. Intraregional differencesare also significant:
the urban share is about 83 percent in Argentinaand 46
percent in Ecuador: it is 24 percent in India and 12
percent in Bangladesh.
Notwithstanding these differences, some comparisons seem to apply broadly across countries. Descriptively, a clear and well-knownassociation is observed
between income level and the percentage of population
which is urban. Asshown in table 1-1,for countrieswith
low incomes, 21 percent of the total population was
urban in 1982. In contrast, 46 percent of the population
was urban in middle-income countries, and 78 percent
was urban for the higher-income industrial market
economies.Abroadpositiveassociationbetween income
levels and degree of urbanization also seems to hold
within regions. (There are, of course, many exceptions
to the simple relation between income level and the
percentage of population that is urban.)
Furthermore, growth in urban populationappears to
have a tendency to decline with rising incomes. This
tendency is reflected in differencesin the rate of urban
population growth among countries with different incomes. During 1970-82 urban population grew at 4.4
percent annually in the low-incomecountries and at a
much higher rate if China and India are excluded.In the
middle-income countries urban population growth was
4.2 percent annually, whereas for the high-income industrial market economiesthe urban populationgrowth
rate was only 1.3 percent a year.
These regularities in urbanization in developing
countries might be expectedas part of the development
process. Some aspectsof present-dayconcentration may
nevertheless be considered especially noteworthy. A
tendency often noted is that largeportions of the populations of rapidly developingcountries tend to be concentrated in one or a fewcities. For the low-incomecountries, on average, 16 percent of the populationwas in the
3
largest city in 1980. In the middle-incomecountries the
proportion was substantially higher, 29 percent. In the
industrial market economies, however, it was only
somewhat higher than in the low-incomecountries-18
percent. Because of the high representation of rapidly
growing countries in the middle-income group, the
figures lend some support to the observationthat one
way in which rapidlydevelopingcountries of todaydiffer
from countries that underwent developmentearlier is in
the tendency for their urbanization to be more heavily
concentrated in large cities. In fact, the overcrowdingin
one or a few cities, and the visible poverty connected
with this phenomenon, are of prime concern; the overall
level and rate of urbanization in the country as a whole
are less prominent issues.
Some Generalizations
Some relations between urbanization and economic
developmentcan be further distinguishedwith the help
of simple descriptiveregressions. For sixty-sixlow- and
middle-income economiesfor which data are available,
regressions have been run using the followingindependent variables: (1) the per capita income rank of the
economy, (2) the percentage rate of growth of per capita
income, (3) the percentage rate of growth of total
population,and (4) zero-onevariablesthat represent the
region in which the economy is located. (For example,
for an economy in Asiathe Asiavariable takes on a value
of one and the values of all other regional variablesare
zero for that economy.)
Degree of Urbanization. When the independentvariables listed aboveare used in a first-regressionequation
to explain urbanization, as measured by the percentage
of the population that was urban in 1980, a high degree
of association is found. The multiple regression coefficient, R2, is 0.769. The most significant variable in
explaining the percentage of the population that is
urban is the income rank. Thisfinding corroboratesthe
positive relation already noted between income and the
degree of urbanization. The growth of total population
has a significant negative effect in explaining the percentage of the population that is urban. This result may
be attributable to slow population growth in higherincome countries, which, in viewof the positiveincomeurban relation, also tend to be the most highly urbanized. The growth of per capita income has a negative,
though less significant, coefficient in explaining the
urban share of population. The most rapid percentage
gains in per capita income occur in countries other than
those which already have high levels of income and
urbanization. Thus, countries with the most rapidly
rising incomes usually have not yet reached the highest
4
6
GeorgeS. Tolleyand VinodThomas
GeorgeS. Tolleyand VinodThomas
which are discussedin casestudydetail in later chapters-and pointsoutthat urbanizationandits accompanyingphenomenaare productsof wider development
processes.Caremustbe takenin the designof measures
and policiesconcerningurbanizationto avoidextreme
correctiveactionsthat mayhamperdevelopment.
UrbanPoverty
Themostwidelyobservedandacutelyfelturbanproblem in developingcountriesis the largenumbersofpoor
and unemployedpeople in the cities. The extent of
poverty in the economyas a whole dependson the
degree of economicdevelopment.Urban poverty is
viewedas part ofoverallpoverty;the ruralpoormoveto
urban areas, which tends to broadlyequilibratereal
incomesacross locations.Povertyis related in great
measureto the sizeofthe low-skilledpopulation,which
is distributedamongurbanand ruralareasaccordingto
economicandother considerations
that affectthe entire
population.
Growthof productionleadsto growthin demandin
urban areasfor all factorsof production,includingunskilledlabor.The changein the proportionof unskilled
workersin urban areas dependson growthin demand
forurbanand nonurbancommodities,
on substitutabilities betweenunskilledworkersandother factorsofpro-
that initiallymakeupa smallpartof the economy,most
oftenin the urbansector,in earlystagesofdevelopment.
Therise in marginalproductivityof all labor,including
unskilled labor, may be slow at first and then may
accelerateas a greater proportionof the economydevelops.Asthe marginalproductivityoflaborrisesin the
courseofdevelopment,the incomesof thoseat the low
end of the incomescalealso rise. Furthermore,since
developmentincreasesthe returns to educationand
other formsofhumancapitalinvestment,manypersons
whowouldotherwisebeunskilledtransformthemselves
into skilledlaborersand thus directlyraise their incomes.The number of unskilledemployeesfalls,and
their marginalproductivityconsequentlyrises.
Urbanization,
whichaccompaniesthe strengthening
of comparativeadvantagesin urban sectorswith develvisiblepovopment,can be associatedwithconsiderable
ertyand otherurbanproblems,particularlyas unskilled
workersbecomedisplacedfromtraditionalruralactivities. Sustainedandcontinueddevelopmentovera long
time wouldbe desirableto ameliorateadjustmentproblems and increasinglyabsorbthe previouslyunskilled
laborersinto the developingeconomy.The origins of
urban problemslie in inadequateand unsustaineddevelopmentandrural-urbanadjustment,but thoseare by
no meansthe onlysourcesof difficulties.
duction, and on the comparative decline of so-called
traditional production in urban and in rural areas. Tra-
ditional productionmay be definedas productionby
firms or householdswhich,althoughthey can modify
their output and techniquesin responseto changesin
pricesofproductsandfactors,are not viablein the face
of competitionfrommoderndomesticor foreignmanufacturingor from modern farmingenterprises.Traditional productionusuallyuses unskilledlabor,and its
declinemayreleaseunskilledlaborto other parts ofthe
economy.Althoughsomeanalystsexplaineconomicdeasa declinein traditionalproducvelopmentexclusively
tion, developmentis here viewedas a broaderprocess
whichinvolvesan accumulationandtransferof knowledgethat could and probablywould occur evenif no
units becameunviable.Thelarge-scaledeclineof industries that engagein traditionalproductionmaybe an
important accompanimentof developmentin some
countries-since the declineis accompaniedby substitutionof capitalfor laborand byintroductionof new
techniques-but in other countriesthisprocessmaybe
an unimportantdetail.Otherthingsbeingequal,if the
declinein traditionalproductionis greaterin ruralthan
in urbanareas,the proportionof unskilledworkersand
henceof poor city residentswill increase.
Even in the absenceof traditionalproduction,developmentmaybe concentratedin industriesor firms
Increasingconcentrationof economicactivitiesand
peoplehas beenviewedas a reflectionboth ofdevelopment and of economicdeterioration.Asalreadynoted,
whereasthe generallyhigherincomesin urbanareasare
associatedwith the benefits of urbanization,urban
poverty and unemploymentand a host of problems
associatedwith pollutionand congestionare the most
noted indicatorsof urban failure.Embeddedin the urbanizationprocessare elementsthat representdevelopmentandthat deserveto be promoted,but urbanization
alsobringswith it extemalitieswhichcan bring about
overcrowding.
Three types of externalitiesmay be associatedwith
overurbanization.First, environmentalexternalities,
suchas thoseconnectedwithpollutionandcongestion,
can meanthat cities'sizesare larger thanwouldmaximizenational(orregional)incomeandwelfare.Second,
protected employmentthat maintains urban wages
abovemarket-clearinglevelsmaymakecitieslarger or
smallerthantheyotherwisewouldbe,dependingon the
elasticityof demandfor labor.Third,the attractiveness
of urban areas (becauseof the availabilityof free or
subsidizedpublicservicesandthe advantagesofproximityto governmentactivities)canleadto excessiveurbanization. Going beyond these urban externalities,a
An Overviewof Urban Growth
hypothesisofferedhere is that the phenomenonof great
urban concentration in one or a fewcities is connected
with the difficultyand relativelyhigh cost of providing
intercity transport in developingcountries, and that
more general infrastructure decisionsalso playa role.
Urbanization Policy in Market
and Mixed Economies
Some of the differencesamong today's developing
countries that merit attention are emphasizedby Renaud in chapter 5. In many of today'sdevelopingcountries additions to population are larger, income levels
are lower,and opportunitiesto relievepopulationpressures through migration are more limited than in
others. Urbanizationin today'sadvancedeconomiespresents a differentset of issues.In some countries there is
a processofa slowdownandan eventualend to urbanization and the emergenceof yet another industrial revolution based on new technologieswhich are less tied to
concentrated manufacturing centers.
ChapterS providesa reviewof urban-relatedproblems
in developingcountries-regional inequalities,congestion, pollution, and inadequateprovisionof urban services-and a threefoldclassificationof relatedurbanization policies:nationaleconomicpolicies,such as import
controls, that havespatial effects;explicitregional development policies,such as investments in infrastructure; and policiesconcerned with the management of
cities.Problems and policyemphasisvaryamong countries: they are influenced by the age-old structure of
cities in Asia, the rapid urbanizationwhich has been
going on for some time in LatinAmerica,and the new
urbanization in several parts of Africa,which started
from a low base and is proceedingat unprecedented
rates.
National economicpolicy sometimes producessignificant and unintended effectson urbanizationwhich
may outweighany direct and intendedeffectsof urbanizationpolicies.The unintendedspatialbiasesof national economic policiesusually favorsome urban centers
andare commonlygeneratedthrough trade policiesthat
protect the manufacturingsector. For example,credit
allocation,public investment,and pricing policiesmay
give preferentialtreatment to economicactivitiesthat
are concentrated in a few cities and regions.The management practices of the central government and its
regulation of economicactivities,which make location
closeto the capitalnecessaryor advantageousfor firms,
also contribute to the urban vortex.
Explicit regional development policies sometimes
attempt to favor decentralization,but they are not alwayssuccessful or efficient.An unintendedby-product
7
of regulations in India that favored rural over urban
developmenthas beenthe encouragementofthe growth
of the urban underground economy.The use of water
resourcesfor regionaldevelopmentpurposesin Malaysia
has been dramatic,and policyattention to leakagesand
regional multipliers has been greater than usual. The
Republicof Korea,becauseof its shortageof land,has an
intense interest in land-use guidelines(see chapters 5
and 8), but in spite of prohibitions and incentives,export-oriented growth policiesand industrializationensured that the largest urban centers, especiallySeoul
and Pusan, would continue to grow. Venezuela and
Brazilhavepursued industrialdeconcentrationpolicies,
with limited success(chapters 9 and 13). In additionto
policy incentives or disincentives,the balance of labor
market considerations, economies of scale within an
industry, and the effectof the total size of a city determine location decisions(chapter 7).
The appropriateinternal managementof cities is important to the successof national spatialpolicies.SubSaharan Africa exhibits acute problems of city management in the face of rapid urbanization,albeit from
modest bases. Centralizationof decisionmakingin Nigeria,for example,has madeit difficultto dealwith local
problems. In very large cities, policiesto limit or stop
populationgrowth are not good substitutes for policies
that address the urban bias and that directly seek to
correct congestionand pollution and provideadequate
services.If other citiesare not efficientlyand effectively
managed,their chancesof attracting industriesand migrants from the largest urban centers will be small.
Regionalpoliciescan strengthen promising secondary
urban centers through well-chosen,cost-efficientactions, better policies for transport investment and
management, industrial estates policies,and more important, the systematicdevelopmentof organizedinformational networks, such as banking networks, industrial association networks, and better administrative
structures, between the secondarycitiesand the capital
region. Good city management and selected regional
investments,combinedwith national economicpolicies
that do not discriminate against rural areas, would do
much to alleviatethe problems of urbanization.
Urbanization Policy in a Centralized Economy
Parish (chapter 6) describes how China's socialistleaders,since their comingto powerin 1949,havetried
to shape the nation's cities to avoid many of the urban
problems encountered elsewhere in the developing
world. Policymakersplannedto restrain the rate of urbanization, since rapid urban growth has often been
accompaniedby an insufficientnumber of suitablejobs
for new migrants from the countryside.They sought to
8
GeorgeS. Tolleyand Vinod Thomas
avoid the pattern found in other countries of rapid
growth of a few large coastal cities at the expense of
smaller interior cities. In addition,they tried to narrow
the significantgapsin livingstandardsbetweenChinese
citiesand rural areas bycreating securejobs and guaranteeing such basicservicesas health, education,housing,
and essential food supplies for both urban and rural
populations.
China's history since 1949brings out both the potential and the disadvantagesof urban developmentin a
centrally planned economy.With greater control over
economicresources than in the averagemarket society,
the government was able to shift investment funds to
promote the development of medium over large and
interior over coastalcities,whichhelpedreduceregional
inequalities. Control over jobs and rationed consumer
suppliesmeant that for a time the governmentwas able
to limit severelythe growth of all cities, and funds that
might havebeenspent on an elaborateurban infrastructure for new migrants were spent instead on rapid industrial growth.
The government has been able to put the urban
populationto work. Mostable-bodiedwomen,andmore
than half the urban population,are employed.Fewof the
jobs are part-time or likelyto be lost tomorrow;theyare
primarily full-time jobs that promise to last for a full
career. In these waysChinesecitieshaveavoidedsomeof
the severeproblemsof unemploymentand employment
instabilitythat have afflictedother developing-country
cities.
Policy mistakes have, however,been madeand have
led to some of the same problemsfound in other societies. For instance, it was an error to downplaythe role
of light industryand consumerservices.Somedeveloping-countrycities mayhavetoo many peoplein informal
service activities,but China illustratesthe problemsof
the opposite extreme. The restricted opportunity for
growth of light industry and the bureaucraticrestraints
on small individual enterprises have fed problems of
youth unemployment.Although elimination of urbanrural income gaps was an objective,on balance a prourban and proindustrial bias might neverthelesshave
existed, as in many other countries.
The unemploymentproblem was heightened by the
rapid expansion of employmentfor women. Jobs were
createdduringthe 1960sand 1970s,but since thosejobs
were taken almost as frequentlyby women as by men,
the needto create additionalopeningswas greater than
in other developingsocieties. Furthermore, the rapid
expansion of secondary school education, as in many
other developingsocieties,contributedto growingnumbers of unemployededucated persons. China avoided
this problem at the universitylevelbut not at the secondary level.The unemployedyouths were particularly
frustrated because the same level of education had
guaranteedgoodjobs just a decadebefore,when education was less common. This frustration-shared with
youths in many developingcountries but perhaps felt
more acutelyin China becauseof the socialistpromiseof
securejobs and rapid development-contributed to the
outbreak of petty crime in the 1970s and continues to
fuel the social alienation of some youths.
China's experience with the virtual elimination of
smallinformalserviceactivitiesillustratesthe necessity
for these types of activities in developingcities. Some
argue that becauseof high populationgrowth rates and
the difficultyof centralizedprovisionof essentialurban
services,the informalservicesector in poor societiesis
essentialand should be embracedrather than shunned.
China's leaders seem to be moving closer to that view,
which entails a greater relianceon market forces, even
though they reject its extreme version. Smaller, more
makeshift work arrangements, organized ad hoc by
neighborhoodsand individuals,with lower rates of pay
and security, are now approvedas a way of providing
both employmentand essentialurban services.Further
effortsto improvethe relativepositionof rural activities
are being made, and farmers are beginning to narrow
the gap between averagerural and urban incomes.
Concentration and Decentralization Policies
At different times and in different countries the
growth of large cities has beenwelcomedand deplored.
Governmentshave used policy instruments to encourage location in major cities or to foster-sometimes
even to force-diffusion. Chapters 7, 8, and 9 examine
the reasonsbehind spatiallocationpoliciesin fourcountries and the outcomes of those policies.
En
couragementof Concentration:Brazil
The relativeemphasison concentrationand on decentralization in Brazil has changed with the varying fortunes of the economy;concernabout concentrationhas
often diminished during times of economicdifficulty.
Neither concentration nor decentralizationmay be undesirable in itself; government policies,however, may
have intendedand unintendedeffectson industrial location which affect economicwelfare.In chapter 7 Henderson examines how government policies have influenced concentration in Brazil, and he attempts to
evaluate the desirability of such influenceswhen the
existence (or absence) of certain types of economiesof
scale in urbanization and industrializationis taken into
account. Thedata base forthe coreof the paper relatesto
1970,and much of the discussionthereforeconcernsthe
An Overviewof UrbanGrowth
historical evolution of policieswhich essentiallypromoted concentration. Some aspects of the distinct efforts in the 1970sto achieve decentralizationare covered in chapter 13.
Localizationeconomies are found to be strong in
Brazil, and therefore agglomeration of firms into specialized cities-to take advantage of such benefits as
efficienciesin labor markets and in servicesspecificto
an industry and greater specialization among firms
within an industry-is advantageous.The present results do not show any significant urbanizationeconomies at the scale of activities prevalent in the urban
centers of the South and Southeast of Brazil in 1970.
The rationale for effortsto encourage industrialization
of the largest urban areas rests on the putative net
benefitsfor heavyindustriesfrom locatingin areas with
a large general scale of economicactivity.Henderson's
findingsdonot, however,supportthis rationale.Rather,
they indicatethat effortsto limit or counter decentralization initiativesmay not be desirable.
In addition, negative extemalitiesin the form of environmental degradationcould constitute grounds for
actuallypromotingsome degreeof decentralization.But
the size distribution of Braziliancities is by no means
excessivelyskewed,and effortsto bringabout decentralizationor a differentdistributionofcity sizes forits own
sake maynot be warranted.Nevertheless,the provision
of more uniform incentivesto middle-sizecities-which
could simplymean the eliminationof anyspecialincentives, direct or indirect, for larger cities in the southern
region-coupled with environmentalrestrictionsin the
highly damagedand built-up areas, could lead to an
economicallybeneficialdecentralizationof activities.
IndustrialMobility and.Decentralization:excessive
Cndstr.iaaMoian
Lee (chapter 8) documents the changing patterns of
employment location in Bogotaand Cali, the first and
third largest cities in Colombia,and summarizes some
econometricworkon locationchoicesbymanufacturing
firms. The studyalso outlines a frameworkfor measuring policyeffectsand drawspolicyconclusions,particularly in the context of Korean experiencewith spatial
policy.
The main phenomenonobservedis the policymakers'
frequent attempts to relocateindustries from the traditional industrial districtsof largecities to outer areas or
to smaller cities. The government'splans may include
developingnew industrial townsor estates or expanding
existing ones to induce new firms or firms that are
moving to settle in a desired area. In all cases implementation of such plans and programs requires the
selectionof particular typesof industriesto occupysites
9
with particular attributes. Hence it is important for
policymakersto understand the requirements of firms
for attaining equilibriumat new locationsand to be able
to assessthe leveland costsofgovernmentsubsidiesand
infrastructure investmentneededto meet such requirements.
The Bogota study did not test the effectivenessof
explicitpolicyinstruments, partly becausesuch instruments were not implementedin that city. Nevertheless,
the behavioralunderpinnings establishedin the study
provide clues as to which policy instruments are most
appropriatefor influencingboth the location choicesof
particular types of firms and the aggregatelocational
patterns. It is apparent that government policies intended to influenceemploymentlocationalpattems can
be effectiveifthey influencethe site attributeswhich are
important to firms.
Lee alsoexaminesurban policy in Korea.During the
past decadevariousspatialpoliciesto controlthe growth
of Seoul and to disperse its populationhave been implemented. For example, in 1971 the greenbelt surroundingSeoulwas established.Subsequentlythe 1977
Industrial LocationAct in effectpreventednew manufacturing firms from locatingwithin Seouland enabled
the governmentto issue relocationorders to establishments already set up there. In 1977 the government
initiated a ten-yearcomprehensiveplan for redistributing population and industry awayfrom Seoul.
Severalother developingcountries havetried to decentralizeeconomicactivityawayfrom the central city.
The economic desirabilityof decentralizationpolicies
has not beenestablished,andnot much is knownoftheir
effects or their welfare implications. The key policy
questionis howto guard againstspatialpoliciesthat are
in relation to prevalent decentralization
trends, since such measures might result in serious
welfarelosses.In developingcountriesthe lackofempirical informationon decentralizationand policy effects
does not yet permit the formulation of more efficient
spatial policies,but policiesto decentralizepopulation
and economicactivityare probablynot goodsubstitutes
for better intemal management of city growth. For example, the effecton air pollutionor on trafficcongestion
of reducing the populationor employmentin a large city
by a certain amount is likelyto be small.
A DecentralizationProgram:
Venezuela
Reif(chapter9) uses the caseofVenezuelato providea
full-fledgedevaluation of decentralizationpolicy. The
goals of Venezuelanpolicy have been to prohibit the
location of new manufacturing in Caracasand its surroundings, to induce hazardous industries to relocate
10
GeorgeS. Tolley and Vmod Thomas
and to encourageothers to moveto designateddevelopment areas, and to attract new manufacturingplants to
the designatedareas. Policyinstruments includedirect
financial and fiscal incentives, indirect benefits, and
negativeincentivessuch as locationalcontrol. Reiffinds
that although little overall deconcentrationtook place
from 1971 to 1978, new firms did tend to leave the
country's dominant industrial area.
It remains to be established,however,that the deconcentration was the result of government policy. An
analysis of the effects of financial, fiscal, and negative
incentives indicates that these had some, though not
major, effects on deconcentration. Reif investigates
other factors and hypothesizes,among other things,
that firms which receive government support benefit
from locationsnear governmentcenters.Aseriesof logit
regressions indicates that wages, access to markets, a
well-trainedwork force, union activity,and availability
of water significantlyaffect firm location decisions,in
contrast to the relativelyless significantperformanceof
government financial incentives.The work shows that
strong economic tendencies must be overcomeif any
appreciabledecentralizationis to be achieved.
Addressing Urban Problems
Part IV of this book contains discussionsof some of
the significantproblems that accompanyurbanization.
Among the most pressing are management of urban
fiscalresources, housing, transport, and environmental
protection.
of UrbanFinance
Management
Growing fiscal problems in cities of the developing
countries have been caused in part by unprecedented
urban growth, for which many countries are illprepared,andby the growingdemandson localservices.
The demand for local servicesis sensitiveto increasing
population,especiallyof the poor. Positiveincome elasticities for public services and demonstration effects
from the developedworld also influencethe demandfor
local services.Factors that affect the cost of local services include wages, labor unions, rising land and
energy prices, inflation, and the increasing costs of
borrowingfunds for large urban infrastructure investments.
The major revenuesources-taxes, user charges,and
external funding-tend to rise less than expenditures
during urbanization,and the result is fiscaland service
deficits. One solution to fiscal problemswould be to
reassign responsibilityfor urban services from local to
central authorities, but Bahl and Linn (chapter 10) do
not recommendthis approach.An alternativesolution is
to increase local tax authority and make more use of
propertytaxes and motor vehicletaxes.Athird solution,
also favored, is to encourage reliance on user charges
(which have the advantage of being directly linked to
services provided). Equity considerations and social
costs (for instance,congestion)may,however,keepuser
charges low.A fourth solution, to increasefiscaltransfers from centralto localauthorities, has many pros and
cons but might be recommendedif proper encouragement to cities can be combined with preservation of
local autonomy. Reforms in urban financial arrangements in developingcountries are proceedingslowly;
political factors contribute to the inertia.
HousingPolicy
In developingcountries,housing is a major consumption category;it constitutes, on average,15-25 percent
of total urban householdexpenditures.Housing is also
one of the most problematic areas in urban development. The most glaring aspectof the problem concerns
sprawling squatter areas, delapidated shelter, and
appallinglackof basicpublicservices.Other dimensions
of the problem are shortages of land, infrastructure
services, off-siteservices, amenities, and employment
opportunities and the inadequatesupplyand rising cost
of housing.
For the overwhelmingmajority,housing is privately
provided. Public authorities, however, implement
licensing,buildingcodes,zoning, and recordkeepingto
ensure clarity in property rights. Governmentsalmost
universallyhavesome activeinterest in housingfinance.
Overt programs of public housing for low-income
groups are common. Housing policymust account for
people's desires and should maximizeincentivesfor individualsto expandthe housingsupply.Publicinterventions should be limitedto areas where the public sector
is best suited to perform, such as direct investment,
pricing policy,and regulation.
To providehousing requires expertisein many areas.
Ingram (chapter 11)stressesthe needforunderstanding
the underlying demand for housing. Heanalyzeshousing demand by renters and owners in Bogotaand Cali,
Colombia,for 1972and 1978.Hedonicpricecoefficients
for housing attributes are used to estimate the cost of a
standardizedunit of housing for each workplace,which
is then used as the price variableto estimate a demand
function for housing that includes other variablesas
well. The effectof incomeon the demandforhousing is
highlysignificant,and its elasticityis in the upperend of
An Overviewof UrbanGrowth
the range 0.2-0.8. Price performsless well:its elasticity
appears to be less than one. Other variablesinclude age
and sex of the householdhead, familysize, and distance
to work.
Transport influences the rate and pattern of urban
developmentand presents multidimensionalissues. Infrastructure in the form of roads and streets is publicly
providedbut entails private use. Urban transport planning requires road layout and in some cases provision
for commuter rail transit. Theselarge-scaleprojectsare
examplesof investmentsthat needrigorous benefit-cost
analysis.
The planning of transport and other large urban infrastructure investments is complicated not only by
income distribution considerationsbut also by the difficultyof taking accountof the feedbackeffectsofinvestments on urban development. If provision of services
merely followsdemand, infrastructure may be a bottleneckto development,and developmentopportunities
maybe lost. Butif infrastructureleads developmentand,
amongother things, fostersnew spatialpatterns, several
problems arise. Infrastructure services that do not
closelyfollowexisting pattems carry the risk that demand will not materializeas had been projected.As a
minimum, benefit-costanalysisof urban projectsmight
introduce spatialmodelingto showprobablefuture residential and business locationsand to estimate urban
developmentwith and without the proposedproject.
Anotheraspect of the urban transport problem is the
provision of public transport, which again involvesinteractions betweenpublic and private decisions.In his
analysisof public transport Pach6n (chapter 12) points
out that private organizationsare responsiblefor most
mass transit in Colombia,although local governments
grant licensesand route authorizations.Disadvantages
can arise from the politicalallocationof routes; examples are parallel routes, duplication of service,and information problems created by the multiplicity of
routes. The system is, however,flexibleand appears to
be capable of handling the informationproblem.
Pach6n gives an economic rationale for preferring
small, less capital-intensivevehicles (such as school
buses,minibuses,and collectivetaxis)over largemetropolitan buses. The growthin the number of smallbuses
in Bogota is a result of lower costs, shorter waiting
times, higher trip frequencies, and a greater income
elasticityof demandfor small-busservice.The desirability of oldand of newbuses is alsorelevant;an analysisof
the age structure, operating costs, and profitabilityof
Colombianbuses is provided.Subsidiesthat encourage
11
investments in buses, fare structures that favor new
vehicles,and licensingrequirements that restrict vehicle stocks are features of the Colombiansystem.
The dependenceon public transport of a large part of
the urban population,particularlythe poor, heavilyinfluences fares and services and increases govemment
involvement. The Colombian analysis indicates the
scopeand problemsofprovidingefficientserviceswithin
this framework.
UrbanEnvironment
Environmental problems are intimately related to
urbanizationbecausegrowing pollutionin the developing countries has been caused largely by growth of
activityin urban areas. Concem has been heightenedas
consciousness about pollution has spread worldwide.
Thomas (chapter 13) analyzespoliciesfor dealing with
the keytradeoffbetweenreducing environmental damage, on the one hand, and, on the other, payingthe cost
of pollutioncontrol and maintainingindustrial competitivenessand growth.
In Brazilthe capital and operating costs of air pollution control equipment and spare parts can be used to
show how costs of pollution abatement vary among
producers. Where effluents per unit of output decline
with the size of a firm, it would be advantageousto
require less than proportionate abatement for larger
producers.An offsettingeffect,however,is economiesof
scale in pollution control. The variation in pollution
control costs by type and size of firm should be considered in devisingpoliciesthat willachievea givenamount
of environmental control at the lowestpossiblecost.
The damages to health from the high degree of air
pollution in Sao Paulo are largeby any standardsand in
comparisonwith the relativelylower risks in outlying
areas and in Riode Janeiro. Aregressionofthe mortality
rate on the pollutionlevel,populationdensity,per capita
income, hospital beds per person, and percentage of
people sixty-fiveyears of age and older yieldsa positive
and significantcoefficientfor particulates.For example,
an annual increaseof one ton of particulatesper square
kilometer in the GreaterSao Paulometropolitanarea is
associatedwith an increase in mortality of twelvepersons per million. The analysisemphasizesthat benefits
from a given amount of pollution reduction in an area
will depend on the size of the population.
The most advantageoustradeoff between reducing
environmentaldamageand maintaining growth can be
achievedby a policy that allows industrial and spatial
variation in pollution control rather than mandating
uniform controls.A promisingapproach is to use emission taxes or pollutionabatementstandards that can be
12
GeorgeS. Tolley and VinodThomas
adjusted to conditions in different industries and districts.
2. These estimatesare basedon Davis(1972),vol. 2, p. 51,
and on more recent data from the World Bank.
Evaluating UrbanProjects
Bibliography
The findings of this book point to net benefits from
selected policy interventions that directly address
selected urban problems. In this connection careful
evaluations of intended and actual outcomes of urban
programs would be helpful. Part of the work would be
better evaluations of urban projects, many of which
Keae
shlter
that rigrous
rigorous
Keare (capte
(chapter 14)show
14) shows tha
involve shelter. invole
evaluation of projects can assist in improving the efficiency and effectiveness of future endeavors in urban
policymaking and inproject formulation and implementation. Although much of the paper deals with specific
shelter projects financed by the World Bank, the lessons
drawn are likely to apply to policymaking as a whole.
The projects are evaluated on the basis of eight
criteria: project design, the selection of project beneficiaries, construction methods, materials loan programs, housing completion, occupancy, maintenance of
housing infrastructure, and community participation.
Given a target group of beneficiaries and a policy objective (in this case, shelter), desirable projects are those
that strive for efficient resource use through decentralized decisionmaking. Keare stresses market solutions
whenever possible and presumes that project participants are the best judges of their own self-interests. In
general, projects should provide participants with suitable locations, secure tenure, and adequate credit but
beyond these should leave most decisions to the participants. Advantages and disadvantages are associated with
construction projects, self-help requirements, housing
standards, rentals, and restricted credit policies. The
costs of delayed occupancy and inadequate maintenance
and the importance of project cost recovery are stressed
in this context.
Notes
1. Much of the informationin this section is from World
Bank (1984).
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