Evidence on the political economy of the urbanization process

Abstract

Urbanization and economic development go hand-in-hand as a country moves from a rural-agricultural base to an urban-industrial base. This paper argues that urbanization per se occurs in response to the basic sector shift out of agriculture, and government policies such as price controls and trade protection of industry affect the process only indirectly through their effect on sector composition. However, urban concentration, the extent to which a country's urban resources are concentrated in one or two large cities as opposed to more evenly spread, is much more directly affected by policies and politics. The paper finds specifically that investments in inter-regional infrastructure facilitates urban deconcentration away from primate to hinterland cities, as does increasing democratization or increasing fiscal decentralization. The findings move beyond establishing basic correlations in the data to trying to quantify causal effects in a panel framework with instrumental variables estimation.