The proportion of a country’s population living in urban areas is highly correlated with its level of income. The correlation between urbanisation and economic growth in developing countries can be explained largely by the fact that economic development involves the transformation of a country from an agricultural economy to an industrial-service economy. Production of manufacturing and services is more efficient when concentrated in cities (Henderson 2000).
In the past, authors such as Jacobs (1969) argued that cities were active agents in economic growth and that there was a causal link between economic growth and urbanisation. More recently this view has been generally disregarded by experts, as a large number of research studies have found no evidence of a causal link between urbanisation and the rate of economic growth (Bloom et al 2008, Henderson 2003, Bertinelli et al 2003, Polese 2005). Recent history illustrates that urbanisation can occur in the absence of economic growth. Although both Africa and Asia urbanised rapidly between 1960 and 2000, per capita income in Asia increased by 340 percent compared with only 50 percent in Africa (Bloom et al 2008).
There is some consensus in the literature that cities offer a range of ‘agglomeration benefits’, which appear to be most beneficial to economic growth up to a certain level of economic development (USD 10,000 GDP per capita) (Bruhlhart & Sbergami 2009). There is a lack of understanding about the mechanisms through which urban areas generate agglomeration benefits and more work is required in this area (Puga 2010). A number of studies emphasise that benefits may vary between individual workers, households, firms, and sectors (Polese 2005, OECD 2009, Duranton 2012). While research into agglomeration benefits provide some reasons why economic growth may be associated with urbanisation, this research does not demonstrate causation (Polese 2005), and there are a number of methodological issues with this literature (Bloom et al 2008).
While urban areas may provide economic benefits, they can also generate economic costs. These costs may be particularly problematic during recent waves of very rapid rural-urban migration, for example in parts of Africa or China (OECD 2009, Henderson 2010).
While urbanisation per se is not causally related to economic growth, there is evidence that the form that urbanisation takes – the degree of urban concentration – has a strong causal effect on growth (Henderson 2000, Henderson 2003). Primacy, (the portion of the urban population living in the largest city), or urban concentration, (the proportion of urban dwellers living in large cities), have been found to have an important impact on economic growth. Very small and very large cities tend to have lower economic growth rates than average sized cities in the OECD (OECD 2009). A high degree of urban concentration is more important in the early stages of development, since this allows the economy to save on economic infrastructure and managerial resources, which may be in short supply (Henderson 2003).
A number of research gaps have been identified in research assessing the policy implications of research linking urbanisation and economic growth. Key areas for future research include understanding how much development should be focused on mega-cities, understanding the long-term effects of mass rural-urban migration and associated rises in inequality (especially in China), and understanding how best to mitigate these effects (Lall et al 2006, Henderson 2010).