Does urbanization affect rural poverty?Evidence from Indian Districts

Massimiliano Calì World Bank

Urbanization and poverty reduction conference World Bank, Washington DC, 13-14 May 2013

Joint with Carlo Menon, OECD

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)

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 stock of world’s rural poor (36%)

• Expected to add a further 500 mln urban dwellers by 2050

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

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)

• 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.

Economic linkages (2/2)

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%)

ΔUrban pop and Δrural poverty (1983-99)

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)

Empirical specification

where H is a measure of rural poverty in district d at time t, α is

district fixed effects, λ is 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.

Baseline estimation via reduced form controlling for direct effects of

urbanisation and for other determinants of rural poverty:

dtdtUjdtstd

Rdt XPH

‘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

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

Results (1) (2) (3) (4) (5) Dep. variable Rural poverty (headcount ratio)

Period 1983-99

Urban pop.t-2 (millions) -0.074***

(0.024) Urb. pop. non poor.t-2 (mil.)

Rural pop. (millions) -0.010 (0.015)

Scheduled caste (share)

Rural pop 15-34 age (share)

Rural lit 15-34 (% in 15-34)

Rural lit 15_34 x Post-1993

Urban poverty (hc. ratio)

Observations 973 R-sq. (within) 0.647 No. of districts 355

1983-99 1983-99

-0.068*** (0.023)

-0.047*** (0.017)

-0.004 -0.004 (0.014) (0.014)

0.338 0.349 (0.290) (0.289)

-3.456*** -3.458*** (0.940) (0.944)

-0.732 -0.740 (0.654) (0.657)

0.241*** 0.243*** (0.082) (0.083)

0.316*** (0.063)

973 973 0.681 0.681 355 355

1983-93 1983-93

-0.101 -0.109* (0.063) (0.058)

0.012 (0.020)

0.374 (0.475)

-3.189** (1.478)

-3.757*** (0.938)

0.012 (0.020)

0.382*** (0.104)

667 667 0.619 0.671 355 355

Robustness (1) (2) (3) (4) (5) Dep var. Rural poverty (headcount ratio)

Period 1983-99 1983-99 1983-99 1983-99 1983-99

Urban pop.t-2 (millions) -0.077*** -0.068*** -0.039

(0.025) (0.024) (0.057)

Urban share t-2 -0.051

(0.157)

Urban pop. of bord. districts (mln)

0.007

(0.057)

Urban pop. cities >20k (millions)t-2

-0.053**

(0.026)

Urban pop. squared t-2 (millions)

-0.007

(0.010)

Basic controls YES YES YES YES YES Agricultural productivity YES NO NO NO NO Observations 762 973 965 961 973 R-sq. (within) 0.669 0.679 0.681 0.686 0.681 No. of districts 274 355 349 355 355

IV results (1) (2) (3) (4) (5)

Period 1983-99 1983-99 1983-99 1983-99 1983-93

Urban pop. (millions)t-2

-0.120*** -0.125*** -0.136** -0.231**

(0.037) (0.046) (0.056) (0.108)

Urb. pop. non poor.t-2 (mil.)

-0.089***

(0.032)

Basic controls NO YES YES YES YES

Observations 926 926 846 926 620 R-sq. (within) 0.006 0.101 0.111 0.101 0.135 Nr. of districts 311 311 284 311 310

First Stage

Migrants from other states

3.433*** 3.337*** 3.796*** 3.307***

(0.488) (0.442) (0.522) (0.444)

Predicted urban population

1.196*** 1.133*** 1.289*** 1.761*** 1.127***

(0.153) (0.146) (0.184) (0.207) (0.147)

Manuf. Shr1981 x post1991

0.816**

(0.395)

What drives the effects? (1) (2) (3) (4) (5) (6) (7)

Rur pov Rur pov AreaPC Non farm shr

Intra rur-urb mig

Rice area Pulse area

Urban pop. (millions)t-2

-0.068** 0.012 (0.028) (0.057) Urban pop.

(millions) 0.079* 0.016* 0.013*** 19.763** -15.227*

(0.042) (0.010) (0.004) (7.991) (9.050)

Cultivated area per capita t-1

-0.071*

(0.040)

Non farm non HH share t-2

1.212***

(0.376)

Non farm non HH share t-2 squared

-1.918***

(0.446)

Intra district rural-urban migrants t-2

-1.046

(0.673)

Rice area sharet-2

0.552**

(0.252)

Rice area x urb. pop. (mln)t-2

-0.300

(0.209)

Pulse area sharet-2

0.169

(0.187)

Pulse area x urb. pop. (mln)t-2

-0.644

(0.514)

74% of the effect

19%

4%

3%

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

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?

Thanks

mcali@worldbank.org