How Urban Concentration Affects Economic Growth

The author explores the issue of urban
over-concentration econometrically, using data from a panel
of 80 to 100 countries every 5 years from 1960 to 1995. He
finds the following: 1) At any level of development there is
indeed a best degree or national urban concentration. It
increases sharply as income rises, up to a per capita income
of about $ 5,000 (Penn World table purchasing parity
income), before declining modestly. The best degree of
concentration declines with country scale. Growth losses
from significantly non-optimal concentration are large.
Those losses tend to rise with level of development, peaking
at a very high level (about 1.5 annual percentage points of
economic growth). Results are very robust. 2) In a group of
72 countries in 1990, roughly 30 have satisfactory urban
concentration, 24 have excessive concentration, and 5 to 16
countries have too little. 3) The list of countries with
highly excessive concentration includes Argentina, Chile,
Costa Rica, and Panama (in Latin America); the Republic of
Korea and Thailand (in Asia); Congo (in Africa); and Greece,
Ireland, and Portugal (in Europe). Many of these countries
have explicitly unitary governments or federal structures
have traditionally been severely constrained. 4) The list of
countries with too little urban concentration includes
Belgium (a small, split country) and special cases such as
Czechoslovakia and the former Yugoslavia. 5) Urban
concentration declines with national scale. It initially
rises with income, the peaks at a per capita income of about
$ 3,000, before declining. If the largest city in a country
is a port, increased trade leads to increased urban
concentration. Otherwise, increased trade leads to
deconcentration as markets i the hinterland open up to
trade. But trade effects are modest. 5) Similarly, more
political decentralization (or increased federalism) only
modestly reduces urban concentration. However, interregional
transport infrastructure - especially dense road networks -
significantly reduce urban concentration, an effect that
rises with income.