India's urbanization trends

Excellent graphics from the recently released IIHS report (pdf here) on Urban India 2011. If we take into account larger villages, half of India's population is already living in urban areas or in areas with similar conditions.

Contrary to conventional wisdom, natural urban gorwth and not migration from rural areas is the major cause of urban population growth.

Despite the increasing importance of cities, urban development remains someway off from the mainstream development radar. The graphic below accurately captures the development priorities of governments in India. The Eleventh Plan (2007-12) allocation to various sectors reveals the low priority for urban development.

Cars and two-wheelers constitute 86% of all vehicles on the road, while accounting for just 29% of all trips. Walks and public transport together form 54% of all trips made. The case for massive investments in public transport is most compelling.

The High Powered Expert Committee (HPEC) appointed by the Planning Commission to estimate the financial requirements of cities has estimated that transportation requirements would form the major share of funds requirement for our cities in the 2012-31 period. However, the major focus of JNNURM has been on water supply and urban housing. In some sense, this is encouraging since it means that the funds requirement for providing the basic non-transport urban infrastructure - sewerage and water supply, solid waste management, and storm water drains - is a small share of the total estimated requirement.

Excellent snapshot (click to enlarge) of the cornucopia of urban social safety programs.

 

Despite the increased pace of urbanization over the past two decades, the share of informal employment as a share of total urban employment has remained stable in the 80% range. Jobs in trade and surprisingly, manufacturing, have been largely confined to the informal sector. 

Spatial clustering is defined as the ratio of the share of employment of a sector in an area divided by the national share of employment of that sector. Values greater than one signifies a relative clustering of that particular sector's employment in the particular region. The graphic below reveals a spatial clustering in the metros and million-plus cities for ICT services, high-tech industries, and fast-growing export sectors.

City-size and inequality

Are larger cities more unequal? Richard Florida points to an interesting paper by Nathaniel Baum-Snow and Ronni Pavan who investigated the effects of city size on wages (controlling for skill, industry etc) across the smallest rural areas to the biggest urban centers in the US between 1979-2004. They write,

"We find that one-quarter to one-third of the overall increase in hourly wage inequality in the United States from 1979 to 2007 is explained by city size independent of observable skill. While this influence has occurred throughout the wage distribution, the fraction of the increase in the lower half of the wage distribution explained by city size is at least 50% larger than that in the upper half of the wage distribution. More rapid growth in within skill group inequality in larger cities has been by far the most important force driving these city size specific patterns in the data. Differences in the industrial composition of cities of different sizes explain 19 to 32 percent of this city size effect."

In the chart above, the X axis is based on city or metro size (ranging from rural areas indicated by a 0 to the largest metropolitan regions) and the Y axis shows the level of inequality. The green line is for 1979, orange for 1989, magenta for 1999, and blue for 2004-07.

In 1979, the line was relatively flat, indicating that inequality was relatively the same regardless of whether you lived in a rural community, small city, or large metro. However, the slope gets steeper with each passing decade, indicating widening inequality with city size. City size "alone accounts for roughly 25 to 35 percent of the total increase economic inequality over this period over and above the role of effects of skills, human capital, industry composition and other factors". And compared to wage distribution at the top, city size explains 50 percent more of the increase in inequality for the low wage earners.

Examining the reasons for this trend, Richard Florida points to the growing advantages of geographic clustering or agglomeration for modern economic activity,

"The larger and more populous a city or region, the more likely it is to have the human capital and economic ecosystems required to support the most advanced — and hence the highest-paying — technologies and industries. Bigger cities attract more innovators, more entrepreneurs, and more highly skilled and ambitious people in general, and provide a fluid environment where these individuals can combine and recombine their skills. Big cities also generate powerful economies of scale and scope, resulting in higher rates of innovation, new firm formation, and productivity. They attract better-educated, better-trained, more-experienced workers, driving up wages.

At other side of the spectrum, manufacturing, which once clustered in and around large cities and metros, has shifted to less expensive suburban, exurban, and off-shore locations. And large cities have become home to a large and growing contingent of lower-skill, lower pay service jobs – from childcare and food preparation to retail sales and personal services. Taken together these factors have in effect divided or bifurcated the labor market in big cities into highly paid 'creators' and much lower-paid 'servers'."

In other words, despite offering better environment, opportunities and wages for less-advantaged and lower-skilled workers, than smaller cities, bigger cities exhibit much higher income inequality.

An ode to cities!

I am waiting to read Edward Glaeser's new book. Till then, via Freakonomics, a few snippets

1. The density of cities generate network effects - "Being near smart people matters". Enrico Moretti has found that people’s wages typically rise by about 8 percent as the share of their fellow urbanites with college degrees goes up by 10 percentage points. He writes,

"I find that a percentage point increase in the supply of college graduates raises high school drop-outs’ wages by 1.9%, high school graduates’ wages by 1.6%, and college graduates wages by 0.4%. The effect is larger for less educated groups, as predicted by a conventional demand and supply model. But even for college graduates, an increase in the supply of college graduates increases wages."

Further, "globalization and new technologies have increased the returns to being smart, and we get smart by being around other smart people".

2. Educated cities grow faster and can better adapt to economic declines. Edward Glaeser and Albert Saiz write,

"Educated cities have grown more quickly than comparable cities with less human capital... We also find that skilled cities are growing because they are becoming more economically productive (relative to less skilled cities), not because these cities are becoming more attractive places to live. Most surprisingly, we find evidence suggesting that the skills-city growth connection occurs mainly in declining areas and occurs in large part because skilled cities are better at adapting to economic shocks."

A good school system that harnesses the urban advantages of competition and innovation adds to the strength of cities.

3. Cities with large numbers of smaller firms have become innovation hubs and have tended to create more jobs. Edward Glaeser, William Kerr, and Giacomo Ponzetto have written,

"Employment growth is strongly predicted by smaller average establishment size, both across cities and across industries within cities, but there is little consensus on why this relationship exists. Traditional economic explanations emphasize factors that reduce entry costs or raise entrepreneurial returns, thereby increasing net returns and attracting entrepreneurs. A second class of theories hypothesizes that some places are endowed with a greater supply of entrepreneurship. Evidence on sales per worker does not support the higher returns for entrepreneurship rationale. Our evidence suggests that entrepreneurship is higher when fixed costs are lower and when there are more entrepreneurial people."

4. Successful cities keep atrtracting migrants. One pre-requisite to keeping the flow of migrants going is to have affordable housing. As cities grow, vacant spaces get exhausted. In the circumstances, the only way for cities to keep housing affordable is to keep building vertically. As Ed Glaeser writes, "Chicago’s sea of cranes on Lake Michigan helps explain why average condo prices in the New York area are more than 50 percent more than condo prices in the Chicago area."

5. Densified and vertically growing cities are more environment friendly than suburban sprawl. Building up is also an environmentally sensitive alternative to building out. Edward Glaeser writes,

"People who live in cities do tend to emit significantly less carbon than people who live in the country... That’s coming mainly from driving, from the fact that there’s just a lot fewer carbon emissions associated with dense living. It’s not just the move to public transportation; it’s also the drivers within cities — they’re just driving much shorter distances. And then, of course, it’s because of much smaller homes. The higher price of urban space means that people are living in smaller homes, even with the same family size. And that leads to lower electricity usage, lower home heating usage — and those are the facts that I think make cities seem, at least to my eyes, significantly greener."

See this excellent article on skyscrapers.

Update 1 (8/3/2011)

A person’s earnings rise by more than 7 percent as the share of people in his or her metropolitan area with a college degree increases by 10 percent, holding that person’s own level of education constant. Educated neighbors are particularly valuable in dense cities, where contact is more common. Edward Glaeser writes,

"Before the industrial revolution, cities were centers of small, smart companies that connected with each other and the outside world. Small companies and smart people are the sources of urban success today. The industrial city now seems like an unfortunate detour during which cities exploited economies of scale but lost the interactive exchange of ideas that is their most important asset...

A great paradox of our age is that despite the declining cost of connecting across space, more people are clustering together in cities. The explanation of that strange fact is that globalization and technological change have increased the returns on being smart, and humans get smart by being around other smart people. Dense, smart cities like Seattle succeed by attracting smart people who educate and employ one another."