UNLEASHING URBANIZATION
Towards Making India’s Urbanization Inclusive
Indermit Gill, Chief Economist; Chor-ching Goh, Lead Economist & Somik Lall, Senior Economist World Bank 1/1/2011 4:25:14 AM
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A few years ago, Slumdog Millionaire, a film set in Mumbai’s slums, picked up eight Oscars, making Jamal and Latika household names across the world. Slumdog Millionaire‘s success generated a lot of debate in India and abroad. Some Indians did not like the graphic images of cruelty and squalor being broadcast all over the world. Why single out India, when all countries have such an underbelly, or had urban squalor until quite recently?
The complainers had a point. No country has urbanized without slums. Not so long ago, more than half of Singaporeans lived in slums. Paris got rid of its last slums just two decades ago. Melbourne, Manchester, or Manhattan, Seoul, Shanghai or Seattle, many of today’s world class cities were littered with slums. But no country has grown to high income without urbanizing. To avoid slums, it seems, is to reject economic development.
Mumbai has not done well in making urbanization inclusive. Cities like Hong Kong, Seoul and New York relaxed their floor area restrictions and built better transport infrastructure to encourage density. For years, Mumbai’s planners went the other way, tightly regulating the height of buildings to control densities and, instead of relaxing these regulations to accommodate growth, further reducing allowable densities. Many poor people in Mumbai 
cannot afford public transport, and end up walking or riding a bicycle to work. Better infrastructure will connect them to prosperity. But while national programs such as the Jawaharlal Nehru National Urban Renewal Mission will improve urban infrastructure and public services in the country’s largest cities and state capitals, they will have to be accompanied by institutional reforms to make land markets work and provide basic services everywhere, especially in slums.
But should such slums be tolerated, improved, or uprooted? The answer, from centuries of experience is that success comes with sequenced measures: first institute land markets and provide essential services such as security, schools and sanitation, and improve transport. Then, with well-timed and targeted interventions, slums can be fully integrated into cities.
The Attributes of an Urbanization Strategy
The issue of urbanization — how to make India’s towns, cities, and metropolises work for a more inclusive development — is one of the most important policy issues confronting the nation today. What are the core elements of an efficient and inclusive urbanization strategy? This article provides an answer to this question, based on the facts, analysis and policy experiences drawn from the 2009 World Development Report, Reshaping Economic Geography (available at www.worldbank.org/wdr2009).
A strategy for urbanization that maximizes the contribution of cities to economic and social development must be realistic in what it can deliver, it should be rigorously derived, and it ought to be reasonable in the demand it places on policymakers for its implementation.
For the approach to be realistic, it must recognize the following facts: (a) A large part of urbanization is generally over by the time a country reaches middle-income, viz., income levels of about $3,700 per capita; (b) the relationship between countries’ income levels and urbanization rates is not different for early and later developers; and (c) urban settlement patterns are similar between countries at different stages of development, and tend to remain stable over time.
For the strategy to be rigorous, it must be grounded in analysis that identifies the role of urban settlements: (a) Towns enable firms and farms to exploit economies of scale; (b) cities allow firms in similar industries to localize and become efficient; and (c) metropolises encourage learning and innovation that comes from urban diversity.
For a strategy to be reasonable, it must be prioritized and sequenced, and recognize capacity constraints: (a) During incipient urbanization, policymakers should not discriminate between urban and rural areas — they should instead provide basic social services everywhere, and ensure functional land and labor markets; (b) at intermediate stages of urbanization, connective infrastructure is needed in addition; while (c) advanced urbanization also requires, in addition, place-based interventions such as slum development programs.
The Richer the Denser
The global development experience shows that the speed of urbanization is most rapid when countries are at low income levels.1 It also shows that the pace and pattern of urbanization is similar for early and later developers. It indicates that all nations have an urban hierarchy of metropolises, cities, and towns, and no country has grown to riches without a shift of populations from villages to urban settlements.
Urbanization’s speed has precedents. Urbanization has always happened early in development, when countries have low levels of income and institutional capacity. This was the experience of early developers such as Britain and France; it happened similarly in South Korea as it grew from low to high income. And this is the situation in India today.
The changes are related to shifts in production from agriculture to industry to services. Without these sectoral transformations, nations do not develop. Without urbanization, these transformations are simply not possible. But appalled by conditions in India’s cities, many continue to call for policies to slow down or reverse the flow of people from villages to its cities.
That would be a mistake. Nowhere has successful urbanization progressed painlessly. “Between 1815 and 1851, for example, France’s population grew from 29 to 36 million and it was the cities that absorbed the thousands of migrants unable to find work in the countryside. But there were simply not enough jobs. Unemployment and overcrowding created appalling living conditions. Only one in five houses had running water. In 1832 cholera wiped out some 20,000 Parisians.” “Like so many other European cities, Paris suffered from chronic post-war housing shortages. Of the 17 slum areas designed for clearance, most were still intact in the 1950s.” Pain-free progress is an unrealistic aim.
Urbanization’s pattern is also not unprecedented. Policymakers are often concerned about the enormous size of today’s cities. Mumbai is believed to be too overpopulated, Mexico City too poorly managed, and Bangkok grotesquely large for midsized Thailand. But rapid growth of large cities at early stages of development is not a new phenomenon, and urban primacy is a common — and often healthy — phenomenon.
But the scale of the rural-urban shift today is unprecedented. With the benefits of better medicine and greater prosperity, today’s populations are bigger. While the world’s largest 100 cities averaged 700,000 people in 1900, a century later this number was 6.3 million. In developing East Asia the scale of the rural-urban shift may be almost two million every month for the next two decades.
While these numbers are daunting, the experience of recent developers shows that they are not unmanageable. And for India to grow to and through middle income to join the the community of developed economies, they must be managed well. But they require a sequenced approach that is deliberate and determined, and founded on a careful diagnosis of the benefits and costs of settlements.
The Benefits of Economic Density
The benefits of urbanization come from “agglomeration economies”.2 These can be classified into three types of scale economies that are facilitated by settlements of different sizes: internal, localization, and urbanization economies.
Internal economies can be facilitated by towns and small cities. Towns facilitate internal cost savings for firms and farms to produce in scale. Such places do not have to be big. What is more important is that they provide basic social services such as schools, streets, security, and sanitation. The town of Sriperumbudur in southern India had fewer than 20,000 people when it was chosen by Hyundai to be the location for its plant in 1999, which had produced a million cars by 2006.
Localization economies usually need medium-sized cities. Cities encourage firms in similar industries to localize and become more efficient. With a ready supply of skilled workers and access to an efficient port, the city of Shenzhen in southeast China has nurtured a bustling electronics industry,
Urbanization economies require large cities. Metropolises promote learning and innovation from urban diversity. By providing a stable economic environment, livability, efficient finance and excellent transport links, Singapore provides services to all of Southeast Asia. These services are used by a wide range of activities from financial, educational, and medical services to shipping and manufacturing. Singapore’s diversity facilitates sharing, matching and learning.
Function — not size — is important; and that places have to be flexible to prosper. Sriperumbudur helps Hyundai and others operate big plants, but it is not a big city. Shenzhen is a big city, but it has specialized in a few industries, mainly electronics. It has helped firms produce electronic goods in large quantities, and access world markets in an efficient manner. Seoul and Singapore have an industrial diversity that has fostered innovation in manufacturing and attracted finance from around the world. What is most important about these places is their function, not their size.
Besides being functional, places have to be flexible. These places have had to do very different things over time. The same bits of land have housed everything from fishing huts and palaces to big factories and skyscrapers. Land use has to be flexible for places to do well.
By doing this, these places have facilitated the growth of what is called “economic density”. Economic density is measured as production or wealth per square kilometer. It is a fundamental concept for urbanization. And the function and form of urban settlements must facilitate it for countries to prosper.
Just as producers specialize, urban settlements specialize to help firms, farms, and families exploit the gains from specialization and trade. Most market economies require the services of villages, towns, cities and metropolises, at all stages of their development. And their growth is largely independent of their size. Indeed, these patterns are so stylized that they are almost considered laws in urban economics (Figure 2). Whether we are looking at low income India, middle income China, or high income US, the patterns are similar and steady.3
Any sizeable nation or region needs a portfolio of places of different sizes, density, and function that facilitate particular types of scale economies. At the top of this hierarchy are a few large cities (see Map 1 for the Republic of Korea’s portfolio of places). They tend to have diverse industrial composition, and cultural and other amenities. Partly because of the attraction of skilled people to this diversity, these cities serve as incubators for new ideas and industries. These cities deliver urbanisation economies, which are the productivity and cost benefits that come from great density and diversity.
Below these large cities are usually an even larger number of medium sized cities. These cities act as regional foci for the economy and society, serving as regional hubs of transportation, finance and commerce. They also act as regional centers of advanced public health, higher education and cultural facilities. They are typically more specialised, being focused on manufacturing and the production of traditional and standardised items. In these secondary cities, localisation economies dominate. These are the benefits from specialisation in a particular industry, such as the availability of a pool of labour whose skills are specially suited to that industry, or specialised firms which supply components and parts within the industry.
Finally, smaller towns are linked to the secondary tier of cities above and connected to a mass of rural areas at the base of the hierarchy. Towns are the connective tissue between rural and urban areas. They are facilitators of internal scale economies as seen in mills and market centers for agricultural and rural produce, and as stimulators of rural non-farm activities. Symbiosis is again the rule. Towns draw sustenance from the agricultural activity of rural areas, but their prosperity also spills over to villages.
India’s map of economic density does not look too different (Map 2). Delhi, Mumbai and Kolkata are the big economic mountains. And it is not at all surprising that poor people want to come to such places: this is where economic opportunities are greatest.
Strategies For an Efficient and Inclusive Urbanization
How can policymakers facilitate such a symbiosis? The experience of successful urbanizers such as the USA, France, Japan, and the Republic of Korea provides clues. Policy needs are simpler, and policy priorities fewer, at early stages of urbanization. They get progressively more numerous and complicated as urbanization picks up speed. Their experience also suggests that the sequencing of instruments should be correct.
First, institutions. Spatially blind “institutions” such as functional land markets and basic social services — schools, security, and sanitation — in rural and urban areas are a large part of an economic integration strategy, and the role of central governments is primary. This is still an unfinished agenda in India’s villages, towns and cities.
Then, infrastructure as well. In areas that are rapidly urbanizing such as Delhi and its neighboring regions, in addition to the institutional foundation, investments in connective infrastructure to prevent early congestion are now important so that the benefits of rising density are more widely shared. Coordination between central and provincial governments is necessary to deliver these services.
Finally, interventions where necessary. Policymaking is hardest for advanced urbanizers such as upper-middle income Brazil, or China’s booming coastal area, and the Greater Mumbai region. In such places, requiring in addition to institutions and infrastructure, well-designed and targeted interventions such as slum upgrading programs or formal housing schemes to reduce within-city divisions. The role of local governments becomes pivotal as urbanization reaches an advanced stage.
Even when strictly prioritized and sequenced, this seems like a tall order for a developing country. The experience of successful countries shows that it can be done. But the policy debates on urbanization are too often narrowly focused on places left behind by growing cities and urban enclaves. The emphasis then turns to interventions such as rural development programs and slum upgrading schemes. World Development Report 2009 proposes instead to focus on the interactions between lagging and prospering places, which are pulled together by the forces of agglomeration, migration, and specialization.
If viewed through the lens of economic geography, India’s teeming urban agglomerations would no longer be seen by concerned citizens as a necessary evil. Migration from rural areas would be seen not as a failure of development policy, but as a sign of the desire of people to prosper. And the social and environmental stresses that come with geographic transformations would no longer considered in isolation from the enormous benefits that come from spatial specialization.
And what is the main implication for policy? Spatially targeted interventions should not be seen as the main instrument for helping people who have been left behind in the rush to cities. India’s central and state governments have far more potent policy instruments for helping people in villages and slums: they can build the common institutions that unify all places, and put in place infrastructure to connect some places to others. Spatially targeted interventions that have been the staple of urbanization and regional development policies in India should be used sparingly and in conjunction with — never instead of — unifying institutions and connective infrastructure.
If history is any guide, better policies do not mean that India will urbanize without slums. But with better institutions and infrastructure half of Mumbai’s 20 million people would not have to live in slums. Slums are a reflection of good labor markets and bad land markets. How else can one explain that cities like Mumbai can both inspire filmgoers with uplifting success stories and horrify newcomers with stratospheric land prices?
End-notes and Additional Thinking
1 See Chapter 1 “Density” in World Development Report 2009.
2 See Chapter 4 “Scale Economies and Agglomeration” in World Development Report 2009.
3 The first regularity is the “rank-size rule” — the rank of a city in the hierarchy and its population are linearly related. The second regularity is the Gibrat’s law — a city’s rate of population growth tends to be independent of its size.
(Indermit Singh Gill, an Indian national, is the Chief Economist for Europe and Central Asia at the World Bank. He was the Director of the 2009 World Development Report 'Reshaping Economic Geography' and the principal author of several major reports, including 'An East Asian Renaissance'. He has a BA and MA in Economics from Delhi University, and a Ph.D. in Economics from the University of Chicago.
CHOR-CHING GOH is a lead economist at the World Bank. She holds simultaneous BA and MA degrees, summa cum laude, from Yale University, and a PhD in Economics from Harvard University. She recently joined the Sudan and Ethiopia teams, and before that, she worked on Russia, Poland, and the former Soviet Republics. She is a co-author of the World Development Report 2009 Reshaping Economic Geography.
Somik V. Lall, an Indian national, is a Senior Economist with the Spatial and Local Development Team of the World Bank’s Sustainable Development Network, and core team member of the World Development Report 2009: Reshaping Economic Geography. Until February 2007, Somik worked for the World Bank’s research department where his research focused empirical analysis of agglomeration economies and transport infrastructure on location decisions and productivity of businesses and identifying mechanisms for providing and financing local public goods in fiscally stressed urban areas. His research has spanned a range of developing countries including Bangladesh, Brazil, China, Colombia, India, Indonesia, Philippines, Mexico, South Africa, and Sri Lanka. Somik holds a B.S. in Engineering, Masters in City and Regional Planning, and a Ph.D. in Public Policy.
The views expressed in the write-up are personal and do not re?ect the official policy or position of the organization.)
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