Does Urbanization Affect Rural Poverty? Evidence from Indian Districts

Although a high rate of urbanization and
a high incidence of rural poverty are two distinct features
of many developing countries, there is little knowledge of
the effects of the former on the latter. Using a large
sample of Indian districts from the 1983-1999 period, the
authors find that urbanization has a substantial and
systematic poverty-reducing effect in the surrounding rural
areas. The results obtained through an instrumental variable
estimation suggest that this effect is causal in nature and
is largely attributable to the positive spillovers of
urbanization on the rural economy rather than to the
movement of the rural poor to urban areas. This rural
poverty-reducing effect of urbanization is primarily
explained by increased demand for local agricultural
products and, to a lesser extent, by urban-rural
remittances, the rural land/population ratio, and rural
nonfarm employment.