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How the economics of urbanization changes between rich and poor nations

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Each month, the NBER Digest summarizes several recent NBER working papers. These papers have not been peer-reviewed, but are circulated by their authors for comment and discussion. With the NBER’s blessing, Making Sen$e is pleased to feature these summaries regularly on our page.

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Insights about the economics of cities have been developed largely from studies in the United States and Europe. But do these insights apply with equal force in the developing world, where in coming years the majority of the world’s urban population will reside? The authors of “What Is Different About Urbanization in Rich and Poor Countries? Cities in Brazil, China, India, and the United States” explore whether key concepts about the patterns of urbanization in wealthy, largely Western nations apply more generally.

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Juan Pablo ChauvinEdward GlaeserYueran Ma and Kristina Tobio focus on three concepts: spatial equilibrium, the notion that differences in wages are offset by differences in costs of living and amenities across metropolitan areas; human capital externalities, the proposition that the productivity of workers of similar characteristics is larger in better-educated areas; and agglomeration economies, which suggest that urban density and proximity increase productivity and local economic success. They find limited support for the spatial equilibrium concept in developing nations, but they find evidence in favor of both human capital externalities and agglomeration economies.

urbanization

The researchers test for spatial equilibrium by investigating if rents rise when earnings rise, if real wages decrease when natural amenities are more desirable and if income is uncorrelated with self-reported happiness. They find exceptions to all three of these predictions of spatial equilibrium. Rents respond strongly to earnings in the U.S., Brazil and China, but not at all in India. In the U.S., real wages are lower in areas with the natural amenity of temperate climate, with average temperatures near 70 degrees Fahrenheit. But the researchers find no relationship between climate and real wages in India or China, and in Brazil, real wages are higher in more temperate areas, primarily because nominal wages are much lower in Brazil’s hottest regions. There appears to be a positive income-happiness relationship across Chinese and Indian metropolitan areas, but less so in U.S. cities.

Agglomeration effects are observed in all four countries, but they were noticeably stronger in India and strongest in China, especially with regard to area density. Human capital is strongly associated with earnings in all four countries. The effect was stronger in Brazil, China and India than in the U.S.

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Skills appear to matter for urban success, and agglomeration increases productivity in all four countries studied. But the data from the United States are noticeably more consistent with spatial equilibrium than the data from Brazil, China or India. Why? One explanation, say the researchers, is that “the spatial equilibrium framework is not particularly relevant in poor, traditional economies, where human-capital heterogeneity is enormous and people remain rooted to the communities of their birth… It seems quite possible that spatial equilibrium emerges with development as human capital becomes more widespread and as people turn to markets instead of traditional social arrangements

— Deborah Kreuze, National Bureau for Economic Research

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