Article by: Syed Abul Hasnat 02 June, 2012

Urbanization as Leading Growth Engine for Bangladesh

Abstract

In recent decades, developing countries—including Bangladesh—have been experiencing a rapid—and steady—rate of urbanization. This geo-demographic transition of human settlement from rural to urban areas has also become a defining characteristic of causes and consequences of structural changes in the economy of a country. The process of urbanization creates opportunities for prosperity as well as—in case of lack of investment, planning, control, and management—helps concentrates poverty and environmental degradation. The ideas of urban misery versus urban nirvana are also discussed. So there is an on-going debate whether urbanization is shaping the developing countries for the better or for the worse. This article presents a set of arguments, which are mostly complementary to each other, in favor of urbanization. The role of urbanization in the socioeconomic development has been discussed as an important catalyst for mobilizing resources, economies of scale, and agglomeration economies with an increasing return to scale. The conclusion of the paper claims that urbanization does not necessarily creates problems but offers a host of opportunities for poverty reduction and sustainable environment by rendering structural changes in the economy, land use, and society (Learner: 2009).

 

Keywords: urbanization, economic development, structural change, economies of scale, agglomeration economies, and environment.

I. Introduction

The aim of this paper is to provide an introduction to—as the title suggests—the role of urbanization as the leading engine of growth. The paper explores the economics of urbanization, envisioning it as the main source of growth in Bangladesh—and elsewhere. First, a concise definition of urbanization and the concept of economic growth are given, followed by explaining the role of urbanization that appears to be instrumental in fulfilling the demand for economic growth through inter-sectoral structural change. Urbanization also provides a large number of pubic goods, including civic facilities and physical infrastructures, required for sustainable development. The conclusion of the paper emphasizes that the relation between urbanization and economic growth is positive and significant. Therefore, the policy makers should support the structural shift over time that urbanization makes necessary for development (Spence et.al. 2009:  xix).

Urbanization is the demographic and physical growth of urban areas as a result of migration, natural increase (representing birth minus death) in population, and reclassification of rapidly developing peri-urban and rural areas to cities. In urban areas, people are engaged in non-agricultural avocations i.e., manufacturing industries and service sectors. It is an anonymous place where people rush by each other but hardly interact. They are—on an average—more educated and better skilled, and their families are smaller and more prosperous than their rural counterparts (Sandu: 2003: 58-66). There is a tension within and between socio-cultural and economic development. A critical understanding of the phenomenon and its actors—the citizens in a built-up area—is important to steer urban development policies. The article is situated against that background.

A simple definition of growth is an increase in the capacity of an economy through a positive change in the level of production of goods and services (Perkins et.al. 2001: 8-10). The concept of gross domestic product (GDP)—though not necessarily  the best measure of economic progress—is most commonly used to measure the annual total and percentage change—i.e. the rate of growth of  national income (adjusted for inflation). From an academic perspective, how does the growth take place may be described with the help of theories and empirics of economic growth and development. This is a more complex discourse that illuminates the difference between stagnation and prosperity over a considerable period of time. Therefore, it deserves a concise introduction that will define the topic of our focus and provide a brief overview of economic growth and urbanization in the context of Bangladesh.

There are, however, a few theoretical concepts—such as agglomeration economies, increasing return to scale (knowledge economy), and urbanization economy—that are at the heart of our discussion, but notoriously difficult to define, let alone draw a clear line between the two concepts. Since the concept of structural change explains the process of economic growth, urbanization, and service sector development, we have given due importance to the literature that has been developed in the context of South Asia, including Bangladesh (Ghani: 2012).

II. The Economic Growth and Geography in Urban Development

Since the end of World War II, the economic growth theory has been mostly dominated by—among other theses—the Harrod-Domar Model. The model implies fundamental changes in the structure of the economy. In its simplest terms, the growth [g] is the result of mobilizing savings [s]—domestic and foreign—for investment with an incremental capital-output ratio [k]. In other words: g = s/k. The key concept of the model is the mobilization of domestic and foreign savings in order to generate sufficient investable resources for accelerated economic growth and development. Below we have discussed the concept of development in which economic growth is considered to be the ‘deep’ or key determinant of development, followed by an acceptable distribution and sustainable environment.

The original idea of neoclassical economic growth is embodied in the production function approach where output (Y) is the function of land and other natural resources (N), labor—skilled, semi-skilled, and unskilled (L), capital—building, machinery, and finance (K), and entrepreneurs (E) who bear risk and uncertainty to make profits. In other words Y = f (N, L, K, E). So, for a sustained growth of an economy, it requires savings (investment) plus total factor productivity (TFP) with a continuous change over time (analog of difference equations) in the system of production by which a nation’s wealth increases.

In the 1950s and 1960s Robert Solow developed a growth model with different vintages of capital: technological change that allows output per-worker to continue to grow over long periods of time. Robert Lucas, in his Marshall Lecture (1986) raised a more fundamental question: “Indian incomes will double every 50 years; Korean every 10.” The question arises what determines the speed of growth: investment, skilled labor, or technology?¹

Since the publications of Solow in the mid-1950s, Paul Romer and Robert Lucas in the 1980s and afterwards explained not only how an economy grows but why some economies grow faster than others—which opened a new genre of development studies. Their endogenous macroeconomic models demonstrate that public policy measures have an important impact on long term growth rates. For example, investment in infrastructure, education and research contributes to higher economic growth at an increasing return to scale because of externality (or spill over) effects.² The contributions of Solow, Lucas, and Romer help economists to better understand—and explain—the why and the how of growth (Roy: 1998).

What is missing from the discourse on economic growth is the discussion of the fundamental units of production: geography, such as cities and regions. Geographical units—in terms of location, place, climate, resource endowments, culture, coastline, and environment—are constituent elements of the engine of growth, forming vast swaths of trade, transport, innovation, and talent. Urban centers are places where entrepreneurship and network fuel economic growth. So, where an economy grows is equally important to know how an economy grows. This ‘where’ aspect of the 21^st century’s world economic growth—followed by the dismantling of once powerful industrial centers of North America, Western Europe, and Japan—is rightly considered by many are the cities of newly industrialized countries, including Brazil, Mexico, China, and India. Many cities of Southeast and South Asia have experienced dramatic economic growth, reflecting the fact the region is completely integrated into the global economy.

The world economy has changed in fundamental ways. The boundaries of the city have been blurred beyond the geographical location and the confines of local communities. Cohen (2003) notes: “ Cities on the forefront of global restructuring,  such as the Hong Kong, Singapore, Seoul, and Taipei have enjoyed unprecedented growth rates of 10% per annum throughout the  1970s and early 1980s. All now rank among the top trading cities in the world and in fact the level of GNP per capita in Hong Kong and Singapore exceeds that of many European countries. The experience of rapid transformation is now being repeated in the newly industrializing economies (NIEs) of Malaysia, Thailand, Indonesia and the Philippines. South Asia has also been making substantial urban progress” (p. 42).²

The above narrative is based on the situation of a decade ago. In 2011, the story of urban Asia has changed in a more positive direction and with higher speed. Several parts of China share many characteristics of other Pacific economies. China’s Shanghai and coastal cities, Guangzhou and Shenzhen, and Indian cities of Mumbai and Delhi are cases of emerging global cities in the world.³

III. The Role of Cities and Urbanization in Development and Change

The traditional geographical ignorance in neoclassical economics—and their disregard for spatial approach to economic growth—has been made to overcome by regional science and urban economics. Albert Hirschman’s The Strategy of Economic Development and Bertil Ohlion’s Interregional and International Trade brought about the new knowledge of how more economic growth can be achieved with the same amount of resources through sectoral concentration of investment and regional specialization of products, respectively.

A seminal work of François Per roux (1950)—and a decade and half latter, the contribution of his student, J. R. Boudebille (1966)—on economics of space brought the discipline of economics from the theories of firm to theories of place and people: where the firms should be located and how the population be hierarchically distributed around the farms, firms, offices, schools, and health clinics. His concept of growth pole impulses has been further elaborated by Brian Berry (1970) and others.  Paul Krugman’s two slim monographs—Geography and Trade (1991: MIT Press) and Development Geography and Economic Theory (1997: MIT Press) earned him a Nobel in Economics. Jeffrey Sachs—and his colleagues—wrote a dozen papers on the geography of economic development that has brought the discipline of development studies to a new height of intellectual power (Sachs: 2000). Now-a-days several economists in the World Bank look at economic growth through economic geography lens (Venables: 2009).

The study of urbanization—and urban development—is now at the heart of the development discourse that encompasses national economic development, environmental management, and social change. The role of urbanization as leading growth engine for today’s developing countries, including Bangladesh, is a matter of fact—not a matter of political debate. Nevertheless, a ‘to the point’ discussion on the role of urbanization                in economic development is in order.

In their scholarly textbook, Paul Knox and Sallie Marston (2001: 402) defined the role of urbanization as follows. “Towns and cities are engines of economic development and centers of cultural innovation, social transformation, and political change.” The authors point to four fundamental aspects of the role of towns and cities in human economic and social organization:

1. The Mobilizing Function of Urban Settlement. The process of urbanization mobilizes people, materials, savings, and innovation. Through this process of resource mobilization and with the help of infrastructure facilities cities offer an ideal location for organizing labor, finance, and technology for production and distribution of goods and services. Those aspects are complementary to each other and one enhances the power of other. A good example of mobilizing skill and talent for the ICT industry is Bangalore.
2. The Decision-Making Function of Urban Settlement. Historically, urban settings bring together the decision making machinery of public and private institutions. Most government offices and corporate head quarters are located in cities. Thus the decision making process is usually occurs in big cities. The city dwellers have greater access to voice their opinions about certain policies adopted and introduced by the government. The city of Dhaka is a case in point (Islam: 2006).
3. The Generative Function of Urban Settlement. Cities fuel generative cycles between completion, innovation, knowledge, and information because of the concentration of people, material, finance, entrepreneurship, and skill. Together, cities offer productivity advantages through externalities.
4. The Transformative Function of Urban Settlement. The socioeconomic realm of a city is much larger than the formal boundary of its municipality. A city becomes richer when it creates wealth with import replacement through its basic economic function (export). In that process the city gets integrated with the global economy and culture through international trade and commerce, technology transfer, and knowledge globalization. An essential component of that change is cultural: the city develops its own brand of cosmopolitan culture.⁴
5. The Political Leadership Function of Urban Settlement. Cities are socioeconomic as well as political entities. The French Revolution (1789-1799), that overthrew the monarchy, began in Paris. The Pakistan movement under the leadership of the Muslim League (1906) was born in Dhaka. The War of Independence of Bangladesh (1971) also started, grew, and ended in Dhaka. It is obvious the society in urban areas is more liberal and open compared to rural areas. Thus it is easier for people in the urban areas to adapt positive concepts and ideologies, such as secularism and democracy. The citizens are also more exposed to cosmopolitan culture.
6. Three other economic factors in the development of cities are more important: i) economies of scale in production and distribution of goods and services; ii) agglomeration economies that results from increasing return to scale (Krugman: 1991)⁵;and iii) the urbanization economies. An increasing return to scale concept is associated with the geography of proximity of functions and knowledge, which has important implications for economic development (policy and planning). A substantial part of today’s economy is a knowledge based economy that seems to favor some well-endowed urban areas. Below is briefly discussed all the three concepts.

Economies of Scale. Two types of economies of scale do exist in private production systems and public distribution systems. It is evident that firms will get extra benefits from producing more products. An increase in production usually increases variable costs (labor, raw materials, and energy), while the fixed costs (rent, permit, property tax, insurance, advertisement) remains the same up to a certain level. Thus, if a company chooses to produce more products, per unit cost of the product will be lower. It is not possible to accrue the benefits of economies of scale in the absence of large scale urbanization. From the distribution side, there is good evidence for economies of scale in the urban water supply system. As the size—and density—of an urban area increases, the marginal supply price of water—and other municipal functions, including sanitation—decreases. Lower cost of production and distribution may encourage expansion of existing—or introduction of new—services. The latter may be defined as induced effect in production and distribution system (Wenban-Smith: 2006).

•  Agglomeration Economies.  As stated above, there are more businesses and infrastructures in large urban areas compared to small urban and rural areas. It is important to realize that often this business has a spill over and complementary effect in that area. From the infrastructure perspective,

Fujita and Francois (2002) argues that ‘positive communication externalities’ are obtained in agglomeration.  Smith (1996: 4) defines the condition of agglomeration more succinctly.

Agglomeration (is) the association of productive activities in close proximity to one another, as in a major specialized industrial region or in a large town or city. The process of agglomeration typically gives rise to external economies associated with the collective use of infrastructure of transportation, communication, facilities and other services. Historically, there is a tendency for economic activity in general to concentrate in major agglomerations, the large market associated with metropolitan areas adding to the external cost advantages. Agglomeration also facilitates the rapid circulation of capital, commodities, and labor. 

Coe, Kelly, and Young (2007:147-8) has further elaborated the concept of close proximity. Their sense of nearness is described as follows:

i) Institutional proximity: nearness created through operating within the same legal and institutional framework;

ii)  Cultural proximity: a nearness derived from a shared cultural heritage (language and custom); 

iii) Organizational proximity: a nearness engendered through both  written rules and codes, and unwritten ways of doing business;

iv) Relational proximity: closeness derived from informal interpersonal relations (friendship and/or professional partnership etc.). Relational proximity may be more important than physical proximity and facilitate the transfer of knowledge and promote joint venture partnerships. An often cited example of agglomeration economies may be useful to clarify the concept. In Bangalore the establishment of universities and research laboratories spurred the creation of other business in that city, such as information and communication technology (ITC) oriented corporations, telecommunication infrastructures, and financial institutions.

1. Urbanization Economies: Sullivan (2000: 17-45) defines the concept of urbanization economies as ‘a second type of agglomerative economy in production that occurs if the production cost of an individual firm decreases as the output of the urban area increases. Conceptually, urbanization economies differ from localization economies in two ways. “First, urbanization economies result from the scale of the entire urban economy, not simply the scale of a particular industry. Second, urbanization economies generate benefits for firms throughout the city, not just firms in a particular industry” (p.32). Henderson (1988) estimated both localization economies and urbanization economies for electrical machinery industry in selected US cities.  He found localization elasticity of output was 0.05 (that means 10% increase in output increases 0.50% productivity, while urbanization elasticity was small—only 0.02). However, in another study, Mun and Hutchinson (1995) found that the effects of agglomeration economies in the office sector, using data from the city of Toronto, were more powerful than those of manufacturing: elasticity of output was 0.27.  In case of production and distribution of utilities, government services, and information and knowledge dissemination, the benefit from agglomeration and urbanization economies is—even more—substantial. A simple example may be, if a city has a large demand for electricity or schools, per unit cost of production and distribution of electricity and schooling will be much lower.

IV. Urbanization and Structural Change in the Economy

In this part we attempt to attempt to explain what is urbanization and why does it happen? In another essay (Hasnath: 2012) I have elaborately discussed those two questions. Here I quote a few lines “The spatial transformation of man, material, and capital—which gives rise to urbanization—contributes to a higher rate of economic growth because households and firms benefit from agglomeration economies of scale through networks, civic facilities, information, mobility, and specialization in given locations of cities and their surroundings.” This transformation leads to a sectoral structural change in the economy.

The process of economic development and the pattern of urbanization are inextricably linked with the change in long term fundamental structures of the economy. Like several other developing economies of the world, The Bangladeshi economy has been undergoing a perceptible structural change. The country’s economy is also gradually being integrated into the world market through the process of globalization. The insight of the following analysis suggests that Bangladesh has a greater prospect to grow through a process of functional urbanization in coming decades provided a congenial investment climate, including good governance, can be ensured through—incorporation into—the process of globalization. The content and discontent of globalization can be balanced following a growth process that is inclusive and sustainable.

The theory of structural change refers to a long-term widespread transformation of the fundamental relationship between and among different sectors—and constituents within the same sector, e.g. from light industry to heavy industry, then to high-tech industry—of the economy. To put it simply, as the economy of a country grows, the relative contribution of the agriculture sector—in terms of GDP share and aggregate employment—declines, while industrial (manufacturing) and service sectors grow (Ejaz and Kharas: 2010). At a more developed stage of the economy, both manufacturing and service sectors become much larger in size, but the service sector appears to be dominant, while exports constitute more high-tech manufacturing and higher knowledge and skills based services. This process of change contributes to urbanization because manufacturing and service industries are located in urban areas, leading to spatial restructuring of the country.  The Table and Figures below substantiate the arguments

Table 1 conomic Structure of Bangladesh by Sectoral Composition and Employment Share in GDP: 1991, 2001, and 2011

	1991	2001	2011	1991	2001	2011
Agriculture	48	24	18	65	60	45
Industry	16	24	29	15	21	30
Service	36	52	53	20	19	25

 

V. Concluding Remarks: Understanding the Link

Urbanization is the single most important phenomenon in the late 20^th century’s developing world. In all probability, this trend will continue for at least another four to five decades, accompanied by prosperity for urban dwellers and predicaments of urban living, if the livability issues—i.e., health, safety, convenience, economy and environment—are not adequately addressed.⁶ Throughout the discussion, we have tried to present the contributions of urbanization—in terms of sectoral structural change—not the issues involved in this changing process of human settlements. It is largely because the focus of this paper is on urban prosperity, not with the problems; although they go together. Antoci et al. (2008), summarizes the major issues as follows:

“Two main factors that have been particularly neglected by the economic development literature: the environmental externalities of human activities and agents’ heterogeneity in terms of asset endowment and, consequently, in terms of income source and vulnerability to depletion of natural resources” (p. 1).

The problems of urbanization are more ubiquitous in large cities like Dhaka and Chittagong. That is not totally because of urbanization per se, but for inadequate allocation of—and attention to —the urban sector and the poor  management of it. There is no denying of the fact that Bangladesh is going through a process of dysfunctional urbanization. That means there is a gap between the level of urbanization and the attributes of urban livability available there. In order to address the issue, the policy makers need to realize that urban growth is not driven by pro-urban bias but because of economic fundamentals. Economic growth without urbanization simply does not take place. Urbanization is considered to be both the cause and consequence of economic growth and social development. This is the lesson of history.

There is an outsized—and growing—literature on the aspects of urban problem.  The writings have hardly achieved any intellectual respectability. Many years ago the scholars of urbanization defined that literature as a “litany” of urban problems (Lakshmanan and Chatterjee: 1977) because of their limited intellectual import. The problems, nevertheless, remain and are being multiplied, so we cannot ignore them. To address the problems even-handedly, we need a discussion of both: prosperity due to urbanization and the actual—and potential—consequences of urbanization at the different stages of development, including uneven development and environmental degradation.

A substantial part of contemporary social science research is devoted to the prosperity aspects of urbanization and its impetus for globalization. The research on the future prospect of urbanization in Asian developing countries has received further impetus from the spectacular growth of the manufacturing industry in China and the information and communication technology and industry in India. Urban centers in both countries are the homes of those industries. The researchers draw examples of positive contributions of urbanization—including mobilization of resources, economies of scale, agglomeration economies, and urbanization economies—from the cities of China and India. We need similar kinds of studies in the context of Bangladesh. The findings of those studies should be given due consideration to the country’s urban development policy and planning (Song: 2010, Hasnath: 2012).

It is clear from the foregoing that urbanization is a catalyst for and the bridge towards greater homogenous national development. The urban center and its economy are considered as the growth pole of development. The primary reason for being so considered is the economic structural change in favor of urbanization in these countries. We have provided a preliminary examination of how and under what conditions this change has been taking place. More in-depth research, leading

to a comprehensive strategy, is required to make sure that in the dilemma of cities as being engine of growth and cesspool of misery, the former must win and navigate the course of development.  To that end, Rondinelli offered a proposal for Asian urban development in 1991:

“Strategies for the 1990s will focus on expanding private investment⁸ to generate employment opportunities; improving the efficiency of metropolitan economies; providing services and infrastructure necessary to stimulate economic diversification and growth throughout the settlement system, especially in smaller cities and towns; and strengthening economic and physical linkages between cities and towns and rural areas” (p. 118).

Many scholars believe his proposal is equally useful and a good pointer for the urban development of Bangladesh in the decades of 2010s and beyond. We could not give a better proposal. The discussion above, however, consolidates our understanding of the role of interplay between urbanization and development. Urbanization has positive and significant effects on both urban and rural development. In her iconoclastic work, Jane Jacobs (1984: 29-44) argues that ‘virtually all economic life, no matter how geographically remote from cities, depends on cities to maintain it or change it.’

So, if the complementarily of functions—urban services and rural resources—is extended over the two locations, then the differences between the two geographies will gradually wither away.

Endnotes

1. Nearly a decade ago, the World Bank (1993: 1) in its Summary Report, The East Asian Miracle: Economic growth and Public Policy [Summary: p. 1] notes:

Between 1965 and 1990 East Asia grew faster than any other region of the world. The main source of this achievement was the seemingly miraculous growth in eight economies: Hong Kong, Japan, the Republic of Korea, Malaysia, Singapore, Thailand, Taiwan, and China. The Report argues that most of the growth has been due to superior accumulation of physical and human capital. But it also shows how these economies are better than most at allocating human and physical and human resources to highly productive investments and acquiring and mastering technology. In this sense there is nothing miraculous about the East Asian success; each has performed these essential functions of growth better than most others.

2. For the present and future of South Asia’s urbanization, see Cohen, Barney (2004), Mohan and Dasgupta (2005), Kundu (2011), and Hasnath (2012).

3. A global city—also known as a world city—is considered to be an important node in the global economic system. Saskia Sassen (2001) chronicles how New York, London, and Tokyo became command centers for the global economy. While Friedmann (1998: 25-54) defines the concept as economic frontiers of global capitalism with corporate headquarters, financial firms, stock market—and headquarters of  international organizations—with advanced transportation and communication facilities. This kind of city is a force contributing to “economic restructuring under global competitive conditions, coupled with a city’s ability creatively to respond to exogenous change” [Italics by Friedmann, p. 34].

4. In urban areas women enjoy more freedom and opportunity to grow than rural women. The issues of women’s right receive more prominence in—and resistance against the abuse of women grows in—urban areas. If modernization is considered to be an important element of economic development then a city is an incubator of—and a catalyst for—modern economic processes and way of life and living.  The evidence of the atrocious Fatwa culture with its oppression on women is more frequent in the realm of rural Bangladesh.

5. The concept of an increasing return to scale is a phenomenon where all inputs (N, L, K, and E) increase by a certain percentage, output grows more than that percentage. That means the whole is greater than the sum of its parts. For example, when all inputs are doubled, output more than doubles. In a Cobb-Douglas production function: Output Q = A L^a + K^b; where a + b >1. This makes it possible to offset the impact of diminishing returns to physical capital, including land.

6. Urban livability refers broadly to those qualities in the physical environment, social wellbeing, and economic development that induce in citizens a feeling of fulfillment that helps them grow and prosper. At community level, the three attributes—physical, social, and economic—that appear together as a set of determinants of livability essentially belongs to the domain of public interest. For the purpose of urban planning, public interest, according to Chapin (1985: 39-52), is identified with the following five elements: heath, safety, convenience, economy, and amenity. Health and safety are frequently involved in combination with strong emphasis on the provision of housing, sanitation, and water supply. Health and safety requirements are directed by land use planning that segregates different types of land-uses such as industrial, commercial, and residential for ensuring environmental qualities, including an efficient level of mobility. Residential areas are further guided by building codes that regulate settlement system and provide adequate environment.

7. We will add four more issues: i) impact of excessive population pressure on land; ii) inadequate investment in infrastructure; iii) lack of land-use control; iv) cities to grow according to whims of powerful politicians and private capital.

8. ‘Private investment’ includes foreign direct investment (FDI). Unfortunately, the level of FDI in Bangladesh is extremely low; only 0.8% of the GDP, while the corresponding figure in Vietnam is 8.4% (UNDP: 2011).

 

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* Acknowledgement

Professor Nazrul Islam assigned me to write this paper for the Bangladesh Urban Forum (BUF) Conference. The event took place at the Bangabandhu International Conference Center, Dhaka in December 5-7, 2011.  Professor Islam was Chair of the BUF Secretariat. He put forward an invitation to participate in the conference, while a travel grant was given by the UNDP Office, Dhaka. I am grateful to both: the person and the organization. Professor Islam and two of my colleagues read the first draft of the paper. The views expressed, ideas presented and the limitations here remain, however, those of author alone.