Urbanization and Poverty Reduction

1. Urbanization and Poverty Reduction Peter Hazell

2. Introduction • In 2008 the World Bank published its World Development Report 2008: Agriculture for Development in which it argued that agricultural development is the key to pro-poor growth. • In 2009 the very same World Bank published its World Development Report 2009: Reshaping Economic Geography in which it argued that urban development is the key to growth, and policies towards rural areas should be sector neutral and focus on improving connectedness and human capital. • How does one resolve this apparent dissociative identity disorder? Must we really choose between rural and urban development?

3. In reality the economies of urban and rural areas are interlinked, so strategies for pro-poor growth need to be based on more spatially balanced investments and policies. • What do we know about these linkages? • let me propose the following evidence-based propositions. (I draw on the synthesis in: Haggblade, S., P. Hazell and T. Reardon (eds.). 2007. Transforming the Rural Nonfarm Economy. Johns Hopkins University Press, Baltimore)

4. Prop 1. Growth in the urban and rural sectors is interlinked • Agricultural growth helps drive the non-farm economy in both rural and urban areas through its farm-nonfarm growth linkages (e.g. increased demands for modern farm inputs, marketing and processing services, household demand for consumption and investment goods and services, supply of savings, and a more abundant supply of foods and raw materials). • Growth of the non-agricultural economy and urbanization generates backward linkages to agriculture and the rural nonfarm economy through urban-rural growth linkages (e.g. increased demand for foods, supply of new types of farm inputs and technologies, wage earnings and remittances, contracting of intermediate goods to rural nonfarm firms by urban based industry).

5. The absolute sizes of these two types of linkages (the multipliers) become more powerful as countries develop (e.g. in the US, the agricultural sector leverages a huge agribusiness sector while income flows from urban based occupations dominate rural household incomes). • The relative importance of farm-nonfarm and rural-urban linkages tend to dominate during early agrarian stages of development, but the urban-rural linkages become more important as the non-agricultural economy, urbanization and per capita incomes grow.

6. Prop 2. The impact of the farm-nonfarm growth linkages on patterns of urbanization is strongly influenced by the initial densities of rural population, infrastructure and market towns • In Asia, the Green Revolution spread across regions that were already densely populated with good road networks and many market towns, and the farm-nonfarm linkages contributed to spatially dispersed patterns of urbanization (i.e. many small market towns developed into intermediate sized towns) • In much of Sub-Saharan Africa, and to some extent Latin America, rural populations and roads are more spatially sparse, and rural towns are few and far between (the missing middle). Here the linkages from agricultural growth tend to be captured by large urban centers, contributing to more spatially concentrated patterns of urbanization.

7. Prop 3. The impact of the urban-rural growth linkages is also influenced by the initial densities of rural population, infrastructure and market towns • Large urban centers stimulate growth in high value (especially perishable) agriculture in peri-urban and well-connected rural areas, but the geographic reach of this linkage is greater given good rural road networks, which in turn depends on the spatial density of rural populations and towns. • Much the same goes for the backward contracting of industrial intermediate goods by urban based industries. • Large urban centers attract seasonal and full time migrants from rural areas who send remittances back home, but the highest share of off-farm income in rural areas typically comes from local and often part time sources of off-farm income. Opportunities for this type of rural household income diversification are greater when urban areas are more spatially dispersed (e.g. lots of intermediate sized towns and good road networks).

8. Implications • Many developing countries have reached the point where urban development and urban-rural linkages are now dominant engines of growth. However, as evidenced in WDR2008, complementary investments in agricultural development can still pay off in their own right, and the relationships discussed above suggest that agriculture can still leverage strong synergies between urban and rural development. These synergies will be greater in countries with high rural densities of people, infrastructure and market towns. • A more balanced spatial pattern of investment is also likely to be more successful in reducing poverty, though the evidence base is less complete. We know that most of the poor still live in rural areas, that in aggregate agriculture has a higher poverty reduction elasticity than industry, and that the farm-nonfarm linkages are beneficial to the poor in rural areas and market towns. But we know much less about the net poverty reducing power of urban-rural linkages in rural areas, or of rural-urban linkages in large cities.