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Sunday, 20 September 2009

Rural - urban drift, 3rd Edition

In a previous post, it was positively asserted that :

Rural urban drift by itself is neither good or bad. In fact, I would go as far as to agree with most urban economists that urbanization and economic development are intimately related, and the concentration of resources – labor and capital – in our cities is a part of this process. To the extent that people move from rural areas to urban areas in response to market signals, there is no reason for us to worry about the rural urban drift. However, the problem might be with respect to unpriced externalities e.g. pollution, road congestion and epidemics. The right policy response is therefore to price these things (through an appropriate urban tax), and allow the rural urban drift to flourish. The problem of course is how to set such a tax properly.
Well, a new paper reinforces these arguments further, positively stating that urbanisation is good for poverty reduction. More importantly it provides some interesting policy prescriptions to ensure that the rural-urban relationship is a win-win :
Using data on Indian districts between 1981 and 1999, we find that urbanization has a significantly poverty reducing effect on surrounding rural areas...The findings suggest that most of the poverty reducing impact of urbanization occurs through second-round effects rather than through the direct movement of rural poor to urban areas..The results suggest that the effect is causal (from urbanisation to poverty reduction), and that failure to control for causality bias the coefficient of urbanisation downwardly. In our preferred estimations, we find that an increase of urban population by one fifth determines a decrease of between 3 and 6 percentage points in the share of rural poverty.

These poverty reducing effects appear to apply mostly to rural poor relatively closer to the poverty line. Although the very poor do not seem to be negatively affected by urbanization, they are not able to reap the benefits of such a growth. These findings may bear a number of potentially important policy implications :
  • First, they may help re-consider the role of public investment in urban areas for poverty reduction. In fact it is a popular tenet that investments in developing countries need to be concentrated in rural areas in order to reduce poverty, as the poor in developing countries are mainly concentrated there...However, investments in rural areas are often very onerous as substantial resources are needed to reach a population which is scattered around vast territories. To the extent that urbanization may have substantial poverty reducing effects on rural areas, urban investments may become an important complement to rural ones in poverty reduction strategies.

  • Second, our findings run counter the popular myth that rural-urban migration may deplete rural areas causing them to fall further behind. The relatively low rate of urbanisation of India itself may also be due to public policies which have not facilitated (and in certain instance even constrained) rural-urban migration... At the very least, this paper questions the appropriateness of this bias against rural-urban migration.

  • Third, to the extent that the benefits from urbanisation do not spill over to the very poor in rural areas, specific actions may be needed to facilitate these rural dwellers to enjoy the benefits of urbanisation. Examples of these may include developing the types of skills useful for an expanding urban sector; or the provision of capital to cover the fixed costs of rural-urban migration.

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