The Economics of Urbanization

By Anjum Altaf

We ought to care about urbanization because it will shape our lives, for better or for worse, and often in surprising ways.

An obvious starter is that all developed countries are predominantly urban. Of course one can ask whether it was development that led to urbanization or the other way around. The historical evidence is clear: cities produced jobs that pulled less productive labor from rural areas. That, in a nutshell, was the story of the Industrial Revolution.

The most unremarked replication in recent times has been in South Korea, going from 5 percent urban in 1925 to 80 percent by 2000. At the same time the country transitioned from an aid recipient to a member of the industrialized world, a donor in its own right.

The implication is not that moving all villagers to cities would yield a development miracle. Cities have to produce jobs at which migrants can be relatively more productive. The benefits of urbanization are linked to productive employment the outcome of which is accelerated economic growth. Urbanization and employment policies are interlinked; the types of jobs and where they are created should determine the beneficial movement of people.

At the same time, urbanization is not preventable or reversible except at huge social cost. Vey quietly, sometime in the early years of this century, the world became urban with more than half its population living in cities; the trend continues unabated whether cities are ready or not for migrants.

The workings of the market economy continue to reduce the demand for labor in farming pushing out people who know it is better to be poor in the city than in the village. Without employment creation, existing cities would become centers of poverty with people eking out miserable livelihoods providing informal services like children wiping windscreens at traffic lights.

The choice between good and bad urbanization is stark with huge implications for society. A little attention can make a big difference in the dynamic that will define our future.

This attention needs to go beyond a focus on mega-cities. While many are aware the world is now urban, few realize that the majority of urbanites reside in secondary centers not in mega-cities. This too has implications for policy design.

Urbanization is distinct from city management. The former is a process involving the movement of people between places connected in a network; the latter is a municipal function specific to individual places.

System designers know that optimizing a network differs from optimizing any one of its parts – the latter most often leads to sub-optimality of the network. Examples are legion. One familiar to Lahoris is the series of underpasses along the canal. As one weaves from one side of the road to the other, it is obvious that had the system had been viewed as a whole the alignment of individual underpasses would have been quite different. The result is compromised efficiency of traffic flow and safety of users.

Good urbanization policy would avoid lopsided attention to megacities and also consider measures in secondary centers that would help the regional economy. For example, poorly functioning land markets stand in the way of the migration of mature industries from big to small cities where land and labor costs are much lower.

This process ensuring the buoyancy of secondary cities is hampered in Pakistan by fears of purchasing land in places outside one’s area of influence. Transparency in land transactions is an essential requirement for healthy urbanization whereby the growth of vibrant secondary cities prevents the overcrowding of bigger ones.

Within individual cities, there is another little understood phenomenon at play. Cities are productive because they provide large pools of skilled labor. But the size of a city’s population is not the same as the size of its labor market – the latter depends critically on the efficiency of city transport.

In terms of labor markets, megacities in Pakistan are agglomerations of many small cities – one cannot go from one to the other in less than an hour, the standard measure of accepted commuting time. There is evidence that for every doubling of labor market size, productivity per worker could increase up to 40 percent. One can immediately see the economic loss imposed by fragmented labor markets. Our cities have all the disadvantages of large populations and few of the advantages of large labor markets.

Rapid transit and reduction of congestion are central to urban productivity; no surprise that almost all large Indian cities are investing in metro rail systems. The most dramatic improvements have taken place in China which has recognized the importance of labor markets. In Shanghai, for example, the population within an one-hour commute time increased from 4 to 12 million in less than 20 years. The BRT in Lahore is a rightful step but much more remains to be done.

The same logic applies to inter-city rapid transit. Once such links are in place, people could live in Gujranwala and work in Lahore which, in turn, would generate the dynamic for investments that would make Gujranwala a more livable city. Once again, this has been witnessed in other countries where suburbs and cities are linked with good transport.

It is ironic that such inter-city commuter transport did exist in Pakistan, a daily train from Sialkot that brought blue collar workers from intermediate stops to Lahore. Instead of improving over time the service became so unreliable it ceased to be a viable option.

Our visionary former Chief Planner succeeded in including a leading role for cities in the New Growth Framework approved by parliament. However, we can be sure it will not be implemented without pressure from below. We need to broaden the scope from cities to urbanization and become active stakeholders in shaping the process that would impact our welfare for years to come. Urbanization will be unforgiving with no second chances. It will not be possible to rewind and re-run the movie if we don’t like the ending.

Anjum Altaf is Dean of the School of Humanities, Social Sciences and Law at the Lahore University of Management Sciences. This op-ed appeared in Dawn on May 6, 2013 and is reproduced here with permission of the author.

Related posts:

Lahore – What is to be Done?
Karachi is a Small City
Urbanization in India: Some Questions



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11 Responses to “The Economics of Urbanization”

  1. Sohail Kizilbash Says:

    Good article. I hope our planners read it.

  2. Y.r. Radhika Says:

    Anjum, may I ask why you chose the decision of Indian cities to go with metrorail systems as an example of their recognition of the importance of reliable transportation? Metro systems are notorious for being a drain on their respective cities. Calcutta Metro has been around for ages but was always run at a loss (it was based on the Washington DC Metro but that too I know was always heavily subsidized). Here too in Vancouver the debate rages on. Metro systems have greater sex appeal for city administrators and the public who associate it with a classier image. But in terms of effectiveness, Mumbai’s LRT is superb – where in the world can you buy a 3 dollar first class fare ticket for a one hour journey! And the network is incredibly dense and effective – I admit that i don’t know if the population densities arose in response to the existence of transit or had existed previously. People even come to work from Pune – Mumbai has a voracious appetite for labour.

    However, I do agree with the basic premise that not recognizing the linkage between transport and labour pool size is detrimental to our economies. India has come late to this realization as to many other aspects of urbanization. Reluctantly I have to admit China’s superior vision in this context.

    • Anjum Altaf Says:

      Radhika: I chose the Indian examples primarily because comparisons with developed countries are dismissed as being far-fetched. The main point is that if Indian and East Asian countries are investing in rapid transit, one must try and understand why they are doing so. That initiates a useful conversation.

      As for whether the investment should be in an underground metro or in a LRT, that is a separate question. My own feeling is that one should not look at such investments in terms of financial self-sustainability alone. There are economic and environmental externalities that result from investments in rapid transit. To take an unrelated example: if one considered financial self-sustainability alone, no city would invest in underground sewerage systems; yet every developed city has done so.

      On Mumbai, did you mean to refer to the Suburban Rail system with its extremely dense and effective network? One thing to keep in mind is that some systems were put in place before the era of mass motorization – London, Tokyo, Mumbai, for example. There the residential housing density patterns are quite different to those in cities where motorized transport preceded investments in rapid transit.

  3. CT Maloney Says:

    Nice comment about Korea but you left out a vibrant fact– the whole population modernized together in 2 generations because at the beginning they decided that all education would be in the PEOPLE’S LANGUAGE. Contrast that with South Asia where because of fascination of English (as a class marker) the bulk of the population is left behind. Of course English is needed to some extent, but all school and basic college instruction should be in the people’s language so all participate in creativity and modernization. Why isn’t all college education in Panjab in Panjabi (phonetic transliteration), in Sindh in Sindhi, etc? With English for special subjects and conferences.

    • Anjum Altaf Says:

      CT Maloney: I couldn’t agree with you more. One big difference between East and South Asia is in education – In addition to the medium of instruction, there have been much greater investments in East Asia as evident by the higher literacy rates and average years of schooling.

      We discussed the issue of the language of instruction in an earlier post on which you had commented:

      I also mentioned the second aspect in the post on urbanization in India (by way of comparison with China). The following section is pertinent: “Almost half of India’s rural population is illiterate and unfamiliar with industrial work making its transition to an urban lifestyle relatively more difficult. Does this imply that a staged pattern migration might be a preferred route to consider?”

  4. Anil Kala Says:

    One can’t disagree with the need of urbanisation to speedily absord growing population in useful jobs. This also allows vacating of rural land, releases pressure on existing forest land and scope to develop new wildlife sancturies. The problem arises when existing tier two towns grow in haphazard way. The planning becomes a casualty of the play of greed and towns grow according to vision of fly by night builders. We need cities like Chandigarh created from scratch meticulously planned by specialists … So what if some say the city lacks character,soul; in time it will acquire its own character and have a soul.
    The problem in creating new mega towns is how to deal with environmental terrorists and alarmists. Today it is impossible to use any land for urbanisation/industrialisation without long and bitter battle with environmental knights. A couple of hundred years back perhaps Singapore was like Andeman Nicobar islands, is it now environmental disaster?

    • Anjum Altaf Says:

      Anil: This needs a little bit of unpacking. It is not urbanization that would lead to useful jobs. Rather, the growth of useful jobs should lead to beneficial urbanization. Therefore, the types of jobs and where they are created would have a bearing on the pattern of urbanization that would emerge.

      In my view, a focus on getting the development of tier two towns right might be better than investing in new cities. After all how many new cities can be built and would that be at the cost of ignoring the existing towns and letting them go from bad to worse? And if greed is the problem, why would it effects remain confined to existing cities?

      Environmental concerns have to be taken seriously and land has also to be fairly compensated – there is no getting away from that in our times. Big cities need not be environmental disasters. In fact, many smaller towns have greater environmental problems because of neglect – the cumulative effect can be significant simply because there are so many more small towns.

      • Anil Kala Says:

        I disagree. Case in point Gurgaon and Noida; these two towns attracted jobs and not jobs created these towns. Initially a few MNCs set up their offices in Gurgaon due to exorbitant real estate price in Delhi soon flood of software biggies lined up offices there. In the wired world old paradigms don’t work.

        Sure environment concerns must be addressed but these blokes think only they are right everybody else is out to destroy green earth. Also the tricky issue of compensation to displaced person needs to be dealt with utmost sensitivity. I think they should he half compensated monetarily and made half equity partners.

        • Anjum Altaf Says:

          Anil: It is not clear what the point of disagreement is. Some towns or cities or industrial estates in the suburbs of existing cities become attractive for job-seeking migrants and grow as a result. The jobs help the growth. What I wished to reiterate was that one doesn’t need new cities for that purpose.

          Your idea on compensation makes sense and has been tried with success in a number of places. It is called land pooling:

  5. Ercelan Says:

  6. Anjum Altaf Says:

    Much to think about in this story on the economics of urbanization in China:

    “While farmers have been moving to cities for decades, the government now says the rate is too slow. An urbanization blueprint that is due to be unveiled this year would have 21 million people a year move into cities… All told, 250 million more Chinese may live in cities in the next dozen years.”

    “An objective rule in the process of modernization… is we have to complete the process of urbanization and industrialization.”

    “Qiyan, previously a village of 200 households, was designated a town, and its lower reaches were leveled and rebuilt with towers to house 6,000 people. Those living in the surrounding hills were encouraged to live in the valley — and not in big cities like Xi’an. The process is known as chengzhenhua, moving into towns, and has become one of the most-debated topics in China. The idea is to limit the number of megacities by keeping farmers closer to the land they farmed instead of moving them to giant cities.”

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