Cities and Growth
in Developing Countries
Gilles Duranton
University of Toronto
March 2007
Starting point
• How seriously should we take the "from cities to growth"
connection?
• Does a growth agenda alter urban policy
recommendations?
• The urban landscape is a (political-) equilibrium outcome
2
Output
An integrated framework to think about cities in developing
countries
• Highly tractable and flexible
• Can be used to make sense of the empirical evidence
• Highlights key policy tradeoffs
• Can be used as a basis for ‘urban diagnostics’
3
A simple graphical framework to think about urban
development
Graphical modelling inspired by Combes, Duranton, and
Overman (2005):
The 3.5-curve approach to urban economics
• A wage curve
• A cost of living curve
• A net wage curve
• A labour supply curve
Think about rich countries for the time being
4
w (N )
Wage Curve
wC
(a )
wB
N
HB
HC
Cost of Living
Curve
5
(b)
H (N )
w (N ) − H (N )
B
wB − H B
wC − H C
C
A
Labour Supply
Curve
(c )
Net Wage
Curve
N
NB
Figure 1
NC
Two important asides
• Natural tendency towards ‘specialisation’
• General equilibrium effects
6
Main policy issues in the 3.5-curve framework
Main inefficiencies
• Local externalities in production
• ‘Urban’ inefficiencies affecting the cost-of-living curve
• Migration inefficiencies
• Inefficiencies associated with the development of new
cities
7
w (N )
Wage Curve
(a )
N
8
Cost of Living
Curve
(b)
H (N )
w (N ) − H (N )
B
C
A
Labour Supply
Curve
(c )
Net Wage
Curve
N
Figure 2a
w (N )
Wage Curve
(a )
N
9
Cost of Living
Curve
(b)
H (N )
w (N ) − H (N )
E
F
B
C
A
D
Labour Supply
Curve
(c )
Net Wage
Curve
N
Figure 2b
w (N )
Wage Curve
(a )
N
10
Cost of Living
Curve
(b)
H (N )
w (N ) − H (N )
E
F
G
(c )
Labour Supply
Curve
Net Wage
Curve
N
Figure 2c
w (N )
Wage Curve
(a )
N
11
Cost of Living
Curve
(b)
H (N )
w (N ) − H (N )
E
C
F
G
(c )
Labour Supply
Curve
Net Wage
Curve
N
Figure 2d
Key issues:
• Some inefficiencies are ‘easy’ to fix, some rather hard,
some extremely hard
• ‘Local’ second-best (key interdependencies)
12
What’s special about cities in developing countries?
The benchmark is consistent with urban features in
developing countries:
• Agglomeration effects (Henderson, 1988; Henderson,
Lee, and Lee, 2001; Lall, Koo, and Chakravorty, 2003;
Lall, Shalizi, and Deichmann, 2004b; Deichmann, Kaiser,
Lall, and Shalizi, 2005; Overman and Venables, 2005; da
Mata, Deichmann, Henderson, Lall, and Wang, 2007)
• Cost of living (Thomas, 1980; Richardson, 1987;
Henderson, 2002a; Timmins, 2006)
• Bell-shaped net benefits (Au and Henderson, 2006a,b)
• Migration (Brueckner, 1990; Ravallion and Wodon, 1999;
Lall, Selod, and Shalizi, 2006)
13
But key features are missing
• Primate city favouritism
• Market access
• Dual labour markets
• Migration
• Dual housing markets (to be done)
14
Primate city favouritism
Driven by politics
• Local rents? (Ades and Glaeser, 1995; Davis and
Henderson, 2003)
• Endogenous (internal) market access? (Saiz, 2006)
• Trade? (Moomaw and Shatter, 1996; Krugman and Livas
Elizondo, 1996; Nitsch, 2006)
• Other channels? (Henderson, 2002b)
15
w (N )
wB
Wage Curve
(favoured city)
Wage Curve
(non-favoured city)
(a )
wA
N
HA
16
(b)
HB
Cost of Living
Curve
H (N )
w (N ) − H (N )
wA − H A =
wB − H B
A
B
(c )
Labour Supply
Curve
Net Wage
Curve
N
Figure 3
Internal market access
As highlighted by the new economic geography (Fujita,
Krugman, and Venables, 1999)
• Empirical work so far: general negative effect of poor
access (Lall et al., 2003, 2004b; Lall, Funderburg, and
Yepes, 2004a; Deichmann et al., 2005)
• Theory highlights non-linear effects (Head and Mayer,
2004; da Mata et al., 2007)
• Should also affect the cost of living (Timmins, 2006)
17
w (N )
Wage Curve
wC
(a )
wA
N
18
HA
(b)
HC
Cost of Living
Curve
H (N )
w (N ) − H (N )
B
Net Wage
Curve
(c )
wA − H A =
wC − H C
A
C
Labour Supply
Curve
N
NA
NC
Migration and dual labour markets
Inefficient migration in the traditional approach (Harris and
Todaro, 1970)
19
w (N )
wA
Wage Curve
(formal sector)
Expected wage
(a )
wB
w
Wage Curve
(informal sector)
N
HA
HB
20
(b)
Cost of Living
Curve
H (N )
w (N ) − H (N )
wA − H A
A
(c )
Net Wage
Curve
wB − H B
B
Labour Supply
Curve
N
Alternative approaches to migrations
Labour Supply Curve
(no mobility)
w (N ) − H (N )
C
Net Wage Curve
(Harris Todaro)
A
F
Labour Supply Curve
(costly mobility)
Net Wage Curve
(standard)
E
Labour Supply Curve
(free mobility)
B
D
N
Figure 6
21
Does all this matter for growth?
Henderson (2003):
• No effect of urbanisation on growth
• But very large negative effects of excessive primacy
How much should we trust these estimates?
22
Explaining large effects of primacy I: static surpluses?
• Like all growth models, city-growth models have two
equations: production and accumulation (Duranton and
Puga, 2004)
• Static externalities in production without action on
accumulation equation might have large growth effects
(through subsistence effect)
• Empirically not very credible
23
Explaining large effects of primacy II: growth
constrained by cities?
The urban system as the spatial imprint of growth:
• Innovation cities vs. production cities (Duranton and
Puga, 2001)
• Business centres vs. production centres (Duranton and
Puga, 2005)
Constraining the urban system may reduce growth
Empirically minor?
• Evidence of some urban differentiation (da Mata,
Deichmann, Henderson, Lall, and Wang, 2005;
Henderson, 2002b, 2005)
24
Explaining large effects of primacy III: Dynamic
externalities
• Cities as engine of growth (Lucas, 1988; Eaton and
Eckstein, 1997; Black and Henderson, 1999)
• Diffusion across cities through workers movements?
• Consistent with large regional disparities
• How important are (dynamic) human capital
externalities?
– Large literature but still open question
– Dynamic externalities taken seriously in
macroeconomics (Klenow and Rodríguez-Clare, 2005)
25
What about policy?
26
Static vs. dynamic efficiency
Traditional urban policies: static in nature
• Housing
• Traffic congestion / public transport
• Delivery public services
• Access / Infrastructure
• Reduction in primacy
• Etc
27
What could foster dynamic efficiency?
• An end to primate city favouritism?
• Many different forms of ‘mobility’?
• Access?
• Many other policy areas whose forgotten urban/spatial
dimension is often forgotten?
28
Drivers of growth vs. constraints and bottlenecks
• Fostering all ‘growth drivers’ may be counter-productive
• The 3.5-curve approach can help identify the constraints
to harmonious urban development
• The diagnostic will differ across countries
• Difficulty: static constraints are easier to identify than
dynamic ones
29
Priorities vs. ‘second-best’
• Politics and other feasibility constraints require priorities
• But hard to achieve results in a second-best world
30
National vs. local ‘cities and growth’ policies
• Strong general case in favour of decentralisation
• But one city alone cannot do much
• Asymmetry: primate city vs. others
31
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