FEATURE STORY April 17, 2019

Structural Transformation Can Turn Cities into Engines of Prosperity

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Skyline of Dhaka, Bangladesh


STORY HIGHLIGHTS

  • Most cities in low-income countries have an undiversified economic structure, with a limited manufacturing sector and small firm sizes.
  • Investments in infrastructure—such as Bangladesh’s Jamuna Bridge—can help promote a structural transformation that increases economic specialization within rural areas and between cities and rural areas.
  • Effective policies for urban development need to account for the dynamic linkages among cities and their surrounding areas.

By 2050, the population of cities is projected to double from its current size, with nearly 70 percent of the global population residing in urban areas. For many, cities are beacons of hope that offer the prospect of a better job or education, but a new body of research is highlighting how the complex interactions between cities, their surrounding rural areas, and structural transformation can make or break cities as engines of prosperity.  

“Poverty reduction is almost universally accompanied by a transition of the workforce from agriculture into higher-productivity jobs in the manufacturing and service sectors,” said Francisco Ferreira, Acting Director of Research at the World Bank. “Urbanization plays a central role in this process, but getting this right requires an understanding of how cities are shaped by investments in infrastructure as well as human capital.”  

At a recent Policy Research Talk, World Bank Senior Economist Forhad Shilpi shared insights into how to manage this process based on more than a decade’s worth of research spanning many of the world’s poorest countries. According to Shilpi, all cities share certain common features: higher population density, a predominance of non-agricultural activities, a high degree of labor specialization, and a diverse set of economic activities.

But history demonstrates that the underlying economic structure of cities can vary significantly.  Prior to the industrial revolution, cities like ancient Rome grew through concentrated trade and services. The growth of manufacturing in the 19th century produced the modern industrial town, exemplified by Manchester. More recently, knowledge-intensive industries have helped shape post-industrial cities like San Francisco.

According to research by Shilpi and her colleagues, cities in many developing countries still bear a greater resemblance to ancient Rome than to Manchester or San Francisco. In Nepal, for instance, Shilpi found that the size of manufacturing firms in cities was on average no larger than in rural areas and these firms employed no more skilled managerial workers than those in rural areas. Both of these characteristics point to an absence of the kind of high-productivity jobs that are associated with economic specialization.

Worryingly, this pattern applies more generally for cities across South Asia and to an even greater degree for many cities in Africa. According to a widely-cited study published in 2000, African countries are prone to urbanization without economic growth. More recent research has found that African cities are relatively closed to the world, with only half of economic activity taking place in sectors that produce tradable goods and services. Some cities have even been described as consumption cities that live off the proceeds of resource exports rather than more dynamic manufacturing and services sectors.

Despite this depressing portrait, Shilpi still offered her audience cause for optimism. In 1999, Shilpi’s native country of Bangladesh opened the World Bank-supported Jamuna Bridge, which crosses the Jamuna River and connects the rural and poorer northwest part of Bangladesh to the rest of the country. The nearly 5-kilometer bridge brought about a dramatic reduction in trade costs with travel time cut by at least four hours and freight costs reduced by 50 percent.

According to Shilpi and colleagues’ research, the greater integration of the northwest with the rest of Bangladesh following the opening of the Jamuna bridge transformed both rural and urban areas. In the northwest, population density increased and rice yields rose significantly. Manufacturing moved to urban areas, while the agricultural and services sectors generated more employment in rural areas. 


"In 1974, Bangladesh suffered a devastating famine. The northwest region was hardest hit. But by 2010, that region had become the breadbasket of the country."
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Forhad Shilpi
Senior Economist, World Bank


“In 1974, Bangladesh suffered a devastating famine. The northwest region was hardest hit,” said Shilpi. “But by 2010, that region had become the breadbasket of the country.”

Additional research on trade costs in Burkina Faso and Mali confirms a broader point: bringing down trade costs through smart investment in infrastructure can allow rural and urban areas to specialize in the sectors for which they are best suited, with benefits for both rural and urban populations.

Another key element that connects cities to their surrounding areas is internal migration. Cities are almost always the destination of choice for internal migrants, but a study by Shilpi and her colleagues of migration in South Africa suggests that the decision about which city to migrate to is far from arbitrary. The study found that unskilled migrants were more concerned with levels of unemployment across cities, while skilled workers were driven more by wage differences.

The results point to the role that migration can play as an engine for equality between regions—those without jobs move to where the jobs are, while those seeking higher wages move to where wages are higher.

For individual cities, this presents a challenge, since efforts to create new jobs will only have a partial impact on their own unemployment rate. Migration can also further exacerbate inequality within a city, as unskilled job seekers find themselves concentrated in areas lacking basic amenities like electricity that the wealthier residents can afford. Shilpi highlighted the positive role that targeted policies—especially education initiatives targeted to poor areas—can play in helping manage these challenges.

Managing cities not as islands, but as parts of an integrated whole, may serve as one of the most effective methods for building a world without poverty.



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