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Does urbanization affect rural poverty? Evidence from Indian Districts

Does urbanization affect rural poverty? Evidence from Indian Districts. Massimiliano Calì World Bank. Joint with Carlo Menon , OECD. Urbanization and poverty reduction conference World Bank, Washington DC, 13-14 May 2013. Main questions (and answers).

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Does urbanization affect rural poverty? Evidence from Indian Districts

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  1. Does urbanization affect rural poverty?Evidence from Indian Districts Massimiliano Calì World Bank Joint with Carlo Menon, OECD Urbanization and poverty reduction conference World Bank, Washington DC, 13-14 May 2013

  2. Main questions (and answers) • Are the poor in rural areas affected from population growth of urban areas? • And if so, what is the size of these effects? • What mechanisms explain these effects? We provide evidence of causal rural poverty reduction of urbanization using data on Indian districts, 1981-99. This accounts for 13-25% of reduction in Indian rural poverty (higher e.g. than land reform effect, Besley & Burgess, 2000)

  3. Why is it relevant? • Most developing countries in rural-urban transition • Most poor in the world are in rural areas • Rural-urban transition accompanied by falling rural poverty but little causal evidence • India has world’s largest stockof world’s rural poor (36%) • Expected to add a further 500 mln urban dwellers by 2050

  4. Location vs. economic linkage effects Two types of effects of urbanization on rural poverty: • ‘location’ effects: allocating the same people in different categories as people change location (i.e. rural vs. urban). • ‘economic linkage’ effects: urban-rural linkages affecting the welfare of rural non migrants. Finding: poverty reduction impact of urbanization in India is due to economic linkages

  5. Economic linkages (1/2) • Backward linkages • increased demand due to higher incomes in urban vs. rural areas (income eff) • larger share of higher value added products (substitution effect) - Parthasarathy Rao et al., 2004 on India • Rural non-farm employment: • Larger peri-urban workforce that can commute to the city to work; • more specialisation, relying on market for consumption • Fafchamps & Shilpi, 2005; Deichmann et al., 2008; Lanjouw & Shariff, 2002 • Remittances: • 80%-90% of rural-urban migrants send remittances home (Ellis, 1998); • reducing resource constraints and insuring against adverse shocks for rural HH (Stark and Lucas, 1988)

  6. Economic linkages (2/2) • Rural land-labor ratio: • migration reduces rural labour supply  increase agric. labor productivity (given fixed land supply and dim. marg. returns to land)  rise in rural wages (Jha, 2008 for India) • Rural land prices: • Higher demand for agr. land for residential purposes due to urban population growth  Increased income for landowners (Plantinga et al., 2002 for US) – net effect on poverty depends on land distribution • Consumer prices: • Growth of urban area  increased competition among more producers  incr. welfare peri-urban consumers • But higher urban demand may raise prices as well Most of poverty reduction due to backward linkages, remittances and rural land-labor ratio.

  7. India’s urbanization, 1981-2001 • Relatively slow urbanization: 23.3% to 27.8%, 1981-2001 • 126 million rise in absolute number of urban dwellers (80% increase in urban population). • Variation in urbanization patterns, 1981-2001: • Idukki (Kerala): +13,000 (+29% urban pop. growth) • Rangareddi (Andhra Pradesh): +1.6 million (+416%) • Pune (Maharashtra): +2.4 million (+130%)

  8. ΔUrban pop and Δrural poverty (1983-99)

  9. Data and Variables • 3 main sources: poverty and socio-demographic variables from NSS, as adjusted by Topalova (2010); towns’ and total rural population from Indian Census (1981, 1991, 2001); Crop production and prices from ICRISAT • District classification “frozen” in 1987 (361 districts) • Variables: • Poverty: headcount poverty ratio • Urban population: 5179 towns in 2001 Census; exclude the state of Delhi and districts with megalopolises; Estimated 1997 population by non linear interpolation (district-wise)

  10. Empirical specification Baseline estimation via reduced form controlling for direct effects of urbanisation and for other determinants of rural poverty: where H is a measure of rural poverty in district d at time t, α is district fixed effects, λis state-year effects, P(u) is the urban population of district d at time t-j, and X is a vector of independent co-variates of rural poverty.

  11. ‘Purging’ location effects • Ideally, we should include the share of poor who migrate to cities of the same district but not available • First proxy: rural pop. in the 15-34 age group, share of literates in this group and share of scheduled caste in rural pop. (their change inversely related to change in their number among the rural-urban migrants) • Second proxy: urban poverty rate • Rural poor migrating to cities are likely to become urban poor • Ceteris paribus, urban poverty rate is directly proportional to the number of poor among rural-urban migrants

  12. Endogeneity • Omitted variable: if poverty reduction and urbanisation are driven by economic growth  state-year effects and urban poverty rate to proxy for ec. growth • Reverse causation: higher rural poverty  higher urbanisation (downward bias)  IV estimation using 3 instruments: • Nr. of migrants to district towns from outside the state • Fixed coefficient approach (Card, 2001; Ottaviano & Peri, 2006) : Share urban pop. in 1971 x Urban national growth (t) • Exploiting trade liberalization: Manf share in urban employment x post-liberalization dummy  IV in first difference estimation using urb. density in 1971 and manf. hare in 1971

  13. Results

  14. Robustness

  15. IV results

  16. What drives the effects? 4% 3% 19% 74% of the effect

  17. Summary • Urbanization has a causal significant poverty reducing effect on surrounding rural areas in India • Increase in urban population by 200,000 reduces rural poverty between 1.3 and 2.6 percentage points • Effect is explained by economic linkages effects rather than location effects • 13-25% of rural poverty reduction associated to urbanization (higher than land reform effects) • Effects explained by four channels: backward linkages, urban-rural remittances; rural land-labor ratio; rural non farm employment

  18. Policy Implications • Re-consider the role of public investment in urban areas for poverty reduction • investments in urban areas can be cost effective (concentrated pop) • (Rural-urban) migration restrictions likely to harm welfare in rural areas • Possible future directions: • understanding whether different types of urban growth yield different benefits • Does the type of urban system matter for rural poverty? • What are the impacts on urban poverty?

  19. Thanks mcali@worldbank.org

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