For the first time in history, more than half of the world's population lives in cities. An estimated 200,000 people move from rural to urban areas every day—about enough to create a new New York City every month. More than 90 percent of this migration is occurring in developing countries.
When one thinks of developing-country cities, some of the first images that come to mind are the shantytowns of Dhaka, Bangladesh; Lagos, Nigeria; and Rio de Janeiro. Living conditions for the rural poor in developing countries are hardly pleasant, but for the urban poor, they can be atrocious. Lacking services such as water, sanitation and trash collection in low-density rural areas is one thing. People can substitute for the lack of public provision with private alternatives such as collecting water from wells and streams, defecating in the bush and burning their trash. But in urban areas, given the close proximities in which people live, these actions impose enormous externalities or are simply infeasible. Urban streams and water sources are almost always polluted and unsuitable for drinking, and public defecation can cause widespread disease outbreaks.
All this begs the question of why developing countries are urbanizing so rapidly. If conditions in urban areas are so bad, why do the rural poor choose to migrate? The answer is simple: The poor can expect to be at least as well off in urban areas as they are in rural areas. While living conditions may be worse, job opportunities in urban areas are sufficiently better to compensate for the health risks and general unpleasantness of living in unserviced urban slums.
Fostering Productivity and Learning
Most research on urban economics has been done in the United States, although the field is growing to encompass developing countries. In the United States, those who move to a major city initially face a real wage decline; they do not earn much more than they could elsewhere, and living costs such as housing are substantially higher. But the wage trajectory is drastically steeper. In-migrants can expect faster wage growth than their counterparts who remain in smaller urban areas. What accounts for this more rapid wage growth? Economists attribute it to learning, which makes people more productive over time. This is not formal, institutionalized learning, but learning by doing and learning from peers. The density of social networks and opportunities in major urban areas and the ability to jump from job to job and accumulate new skills allow urbanites to become more productive over time.
Alfred Marshall, a 19th century English economist, referring to London, Manchester and Birmingham, wrote that “in districts in which manufactures have long been domiciled, a habit of responsibility, of carefulness and promptitude in handling expensive machinery and materials becomes the common property of all. . . . The mysteries of industry become no mysteries, but are as it were in the air, and children learn many of them unconsciously.” He was referring to knowledge spillovers. In cities, there are greater opportunities for social learning. This is the reason industries agglomerate. Technology firms cluster in Silicon Valley in the San Francisco Bay area and along Route 128 around Boston because the density of similar workers and firms allows people to transition to new jobs and gain experience from one another. An isolated technology firm cannot expect to recruit the same level of talent and be as productive as if it were located in the center of Silicon Valley. As portrayed in the 2010 movie The Social Network, Sean Parker, co-founder of the file-sharing service Napster, convinces Mark Zuckerberg to move Facebook to Silicon Valley because “that’s where the action is.”
In developing countries, the action is in cities. Jobs, social learning, infrastructure, schools—because of these, cities are the drivers of economic growth. The fixed costs of providing expensive infrastructure are spread over a larger population, and new tools and techniques can disseminate more quickly given the density of social networks. But to benefit from these, migrants from rural areas have to forego the informal social safety nets provided by their families and bear the risks of migrating to a city. They may be lucky and find employment and housing, or they may be the unlucky ones who wind up homeless on the streets of places such as Dhaka, Lagos and Rio de Janeiro.
Keeping In-Migrants Out
For those who have visited these cities, one of the most striking dichotomies is the wealth that exists alongside extreme poverty. The metropolitan area of S‹o Paulo produces the same value of goods and services as the entire country of Argentina and has more helicopters per capita than any other city in the world. Why do unserviced slums exist in a city this wealthy? Surely, S‹o Paulo has enough resources to provide its residents with water, sanitation and basic housing. But doing so would attract even more migrants and create more congestion, and existing residents would have to bear the costs of subsidizing public services for poorer in-migrants. In a paper I wrote with Vernon _Henderson, a professor at Brown University, we found that wealthy and congested cities in Brazil chose not to connect migrant households to water as an exclusionary tactic. By making living conditions for these households more miserable, these cities could deflect new migrants elsewhere.
Such exclusionary tactics are not peculiar to developing countries. In U.S. cities, we have zoning requirements, minimum lot-size restrictions and height restrictions that drive up the cost of housing in the most desirable locations. Living in Manhattan, San Francisco or Washington, D.C., is expensive largely because of supply restrictions. Wealthy suburbs with high-quality schools prevent in-migration of poorer households by requiring that only larger and more expensive homes be built in their jurisdictions. And prior to the construction of our interstate highway system, the parkways around New York City were famous for having been built with low overpasses that prevented buses and the African-Americans who rode them from accessing the suburbs. China also restricts rural-to-urban migration, but does so explicitly through its hukou system, whereby residents without legal permission to live in an area are denied public services. In Mumbai, a city with 14 million people, most residential construction cannot be more than two stories tall. This means that homes are small and crowded, and rents are expensive. In fact, rents in Mumbai rival those of cities in much wealthier countries.
All of these exclusionary policies distort the housing and labor markets. They prevent migration from less desirable and less-productive locations by artificially making more-productive locations less accessible to the poor. And at the same time, governments implement place-based policies in an attempt to prop up unproductive locations. Faced with a loss of more than one-third of its peak population, Detroit built the People Mover, a Disneyland-style tramway, and gave tax breaks for new construction in its central business district. Rebuilding New Orleans following Hurricane Katrina in 2005 cost more than $200 billion, or about $400,000 per family. If each of these families had been given $400,000 in cash to pay for moving expenses and housing and education elsewhere, they likely would have been better off. Similarly, in a paper I wrote a few years ago, I found that decades of subsidized bank lending to less-developed cities in Brazil did little to help these locations grow in a sustainable way. While subsidized lending artificially increased employment, as soon as the subsidies were phased out, these cities declined and lost population.
Investing in People
Instead of trying to shore up unpro_ductive locations, the role of governments should be to make productive locations more accessible to more people. This involves, first and foremost, investing in people versus places. In a famous series of papers, economists Michael Kremer and Edward Miguel found that deworming drugs given randomly to a subset of schoolchildren in rural Kenya greatly reduced the incidence of intestinal worms and allowed these children to participate more in school. When these chil_dren grew into adults, they had higher incomes—not because they were more educated, but because they were healthier and more inclined to migrate from rural to urban areas. In Mexico, cash transfers given to the poor conditional on children’s school participation increased their years of schooling. But the practice also increased out-migration. There may be diminishing returns to additional years of schooling in rural areas where occupations are limited and often require only basic skills, but this is not the case in urban areas, which offer greater opportunities for occupational growth. The beneficiaries of Mexico’s Progresa/Oportunidades cash transfer program earned higher incomes because their greater years of schooling made it easier for them to migrate to cities and find jobs.
Implicit in these types of programs is that unproductive locations will lose population and experience a demographic shift toward having a greater proportion of older and poorer residents. But that is a necessary trade-off in implementing programs that increase mobility and help people move to locations that can better complement their skills. There will be areas that win and areas that lose.
The complement to investing in people is that government policies need to make productive places more accessible. This involves limiting the NIMBYism (“not in my back yard”) that too often takes hold in elite cities. While incumbent residents may not have anything against poorer in-migrants per se, they do not want them living nearby. What results are exclusionary policies, such as zoning restrictions or the failure to connect slums to city services. A way around this is to federalize zoning and building regulations. When cities cannot differentially restrict housing supply, housing will increase where there is the greatest demand, and this will keep it affordable for incoming migrants. The world’s most-productive cities will get even larger and more congested, and investments in transportation and public infrastructure will need to be made to keep these areas manageable.
Much of economics deals with resource allocation. Countries can grow faster if resources such as capital and labor flow to the most-productive firms. Gains from trade rely on countries specializing in and producing goods in sectors where they have a comparative advantage. The same is true with population and cities. If people can migrate to the most productive cities—and benefit from their dense networks and knowledge spillovers—then economic growth will be faster. The story of development is a story of structural transformation and urbanization. The key is to facilitate this process by making cities more inviting places for rural-to-urban migrants.