Does urbanization affect rural poverty? Evidence from Indian Districts

1. Does urbanization affect rural poverty?Evidence from Indian Districts Massimiliano Calì World Bank Joint with Carlo Menon, OECD Urbanization and poverty reduction conference World Bank, Washington DC, 13-14 May 2013

2. 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)

3. 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 stockof world’s rural poor (36%) • Expected to add a further 500 mln urban dwellers by 2050

4. 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

5. 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)

6. Economic linkages (2/2) • 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.

7. 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%)

8. ΔUrban pop and Δrural poverty (1983-99)

9. 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)

10. Empirical specification Baseline estimation via reduced form controlling for direct effects of urbanisation and for other determinants of rural poverty: where H is a measure of rural poverty in district d at time t, α is district fixed effects, λis 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.

11. ‘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

12. 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

13. Results

14. Robustness

15. IV results

16. What drives the effects? 4% 3% 19% 74% of the effect

17. 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

18. 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?

19. Thanks mcali@worldbank.org