11th August 2011
University of Amsterdam
Faculty of Economics and Business
Thesis Bachelor of Science in Economics and Business
The impact of urbanization on economic growth in terms of
GDP and poverty
Xinxing Zhang
5941520
Supervisor Nienke Ruijs
1
Table of contents
I. INTRODUCTION...................................................................................................................3
II. ECONOMICS DEVELOPMENT – FOUNDATION OF URBANIZATION………….4
III. URBANIZATION IN EAST ASIA………….....................................................................6
IV. EAST ASIA URBANIZATION PROPELS GDP GROWTH………………………......9
V. EAST ASIA URBANIZATION IN THE FACE OF POVERTY……………………….11
① POVERTY REDUCTION………………………………………………………………...12
② POVERTY INCREASE.......................................................................................................12
③ POVERTY IMPROVEMENT…………………………………………………………....14
VI. CONCLUSION………………………………………………………………………...…14
VII. BIBILIOGRAPHY………………………………………………………...…….……...16
2
I. Introduction
Since the 20th century, urbanization has widely spread over the world as a popular trend.
There is a general tendency for the population to concentrate quickly in urban areas. From
the global point of view, between 1900 and 1950, 500 million additional people were
declared urban population; while between 1950 and 2000, urban population grew by 2.1
billion. It is also expected that until 2030, the population change will be reaching 60.2
percent (Mohan & Dasgupta, 2005).
Urbanization in Asian countries has drawn particular attention from scholars.
Mohan and Dasgupta (2005) stated that “East and Southeast Asia has long been one of the
world’s most rural areas.” He also expects that Asian urban population is going to be
doubled in the next 20 years. More specific data regarding the speed of Asian urbanization
was provided by Jones (1997). He expected that a growing rate of urban population of
around 17 percent will be reached in East Asia in the same period. Therefore, the image of
East and Southeast Asia as rural regions no longer reflects reality.
Accompanying urbanization, almost at the same period, East Asia has experienced a
dramatic high growth of economic development. Japan, South Korea and China, as three
typical country examples have been often reported in the news, showing their increasing
production, exports and high level of GDP. It is commonly thought that a connection
between urbanization and economic growth exists. The worldwide urbanization process has
contributed to enormous economic growth and benefits to most Asian countries. It is
therefore interesting to investigate more and find out the concrete impact of urbanization on
GDP level in East Asia.
However, from another perspective, though fast economic growth has drawn
particular attention, it can not be ignored that some East Asia countries have not escaped
from poverty at all. Surprisingly, the gap between poor and rich has unexpected extended
and groups of poor has become even poorer. In fact, a large number of scholars believe
urbanization is plausible because reduction in national poverty is followed by urbanization;
nevertheless, negative impacts on poverty have also been caused by urbanization.
3
Therefore, the impacts on poverty and the reasons behind are going to be analyzed in this
paper.
Though large amount of research from various perspectives focusing on
urbanization in East Asia has been done, economic development along with urbanization
is being valued as one of most essential consequences among all. The domains of research
from other perspectives including cultural change, political change influences
urbanization, public infrastructure development results from urbanization and overurbanization problem. Based on the above background, this paper aims at investigating
the impact of urbanization on economic growth with respect to GDP. At the same time,
poverty problem resulted from urbanization will also be addressed.
The research question of this paper is
What is the impact of urbanization on economic growth in terms of GDP
and poverty?
The structure of this paper is as follows: How economic growth promotes
urbanization process will be revealed, followed by a review of more concrete current status
of urbanization in Eastern Asian nations. The main body of the paper is going to be
constituted by the analysis of GDP growth, as a consequence of urbanization and the
analysis of both negative and positive impacts that urbanization has on poverty in East Asia.
II. Economic development— foundation of urbanization
Before heading to answer the research question addressed in this paper, a brief introduction
of the definition of urbanization and the economic causes of urbanization is to be of great
help for readers to understand the further analysis of the research question.
Urbanization is the spatial concentration of people and economic activity from rural
to urban areas (Roberts & Kanaley, 2006). Essentially, urbanization is an economic process
as well as a global social economic phenomenon. It furthermore helps to relocate labor
from rural areas. In addition, urbanization is a historical process which emerged from the
industrial revolution. Subsequently, industrialization is the engine and motive power of
urbanization. As such, the urbanization process and the industrialization one cannot be
separated. One may say that industrialization has been accelerated by urbanization (Zhong
4
& Wu, 2006). It is the combination of both population and economic activities which play a
vital role in development of urbanization. With the development of a technical and
industrialized society, the urban population experiences unceasing expansion. Urban life
style and its civilization fast spread over rural areas, resulting in much faster development
in cities (Ellison & Edward & William, 2010).
The result that urbanization is endogenous comes out from economic growth, as has
been shown by lots of researchers. Northam (1975) believes that the more advanced the
development of economy, the higher the level of urbanization. Regarding the discrepancy
in progress of urbanization, 60%-70% can be interpreted by different economical levels of
development; while the remaining is attributed by other factors, such as economy structure
etc. This is the conclusion made by Paul (1988) after his research on how the total amount
of economic growth benefits urbanization process. American geographer Brian Berry (1962)
pointed out that the level of urbanization in a country can be reflected by the country’s
level of economic development. Berry selects 95 countries with 43 variables principal
component analysis to explain his results. Analysis shows that the economic, technological,
demographic and educational factors are closely related to the level of urbanization. It also
proves that economic growth promotes urbanization.
The above are theoretical conclusions drawn from scholars that economic
development fosters urbanization. The next paragraphs are going to present the
comprehensive economic reasons for the conclusions.
Economic development and industry development are hand in hand. Industry is
generally located in urban areas. Any industry needs to be close to other businesses to trade
information and goods. Also any industry has a need for a very large workforce, which is
provided by the large population of the area. The industrial revolution played a major part
in the urbanisation of MEDC's (More economically developed countries). Because an
industry started in urban areas, it is much easier for other industries to set up in urban areas.
Urbanizaiton provides them with an advantage of being located near many other industries
and services that are necessary (Tian, 1996).
In LEDC's (Less economically developed countries) the economic growth not only
has an impact on industry and business expansion, but also creates the need for
consumption. Urban areas provide many more services than rural areas and if the people of
5
LEDC's could find work, they would be able to consume more. In rural areas they would
either have to produce their own food or have to travel quite a significant distance to get
what they need. People begin to grow tired of living in poverty and slaving over a farm that
is not producing effectively (Tian, 1996).
Apart from industry development, as an indication of economic growth contributing
to urbanization, agriculture and service sector can be used to explain the proposition. When
viewing urbanization from an industry perspective, it is a flowage of production factors,
such as materials, labors, capital, etc. among industries. Therefore, industry transition and
development are strong powers that promote urbanization. In agriculture, the use of modern
techniques improves agricultural productivity and reduces the demand for labor force.
Hence, it contributes to a movement of the rural population towards urban areas.
Agriculture is considered to be a “push power” in the process of urbanization (Tian, 1996).
Industry and the third sector are the “Pull power” of the urbanization. However, it
should be taken into account that industry and the third sector function differently on
pulling the development of urbanization. Industry brings an enlargement in city scale and
an increase in the amount of cities; while the third sector promotes the improvement on
facilities and living standards. Phrasing differently, industry and the third sectors represent
the improvement on “quantity” and “quality” accordingly (Tian, 1996).
III. Urbanization in Eastern Asia
As the main research question introduced above, in order to analyze the impact of
urbanization on GDP growth and poverty, it is worth starting with presenting a general
picture of undergoing East Asia urbanization. East Asia is undergoing a similar population
growth and demographic transition following Latin America by the end of 20th century.
The urbanization achievement in Latin America has been truly remarkable with respect to
the number of people who migrated from rural area to urban area. Latin America reached
the level of urbanization to 75 percent from only 40 percent in the second half of 20th
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century (Mohan & Dasgupta, 2005). Compare with Latin America, below Table 1 ①shows
the significant changes in population in Eastern Asian nations statistically. According to
figure, referring to three major Eastern Asian countries, namely China, Japan and Republic
of Korea, their urban rates are up to 43%, 80%, 91% accordingly by 2010. Except for a
high level of urbanization in Japan, whose urban percentage remains above 70%, China and
Republic of Korea have constantly increased their urban population from 1970-2010. China
contributes to the urbanization of East Asia due to the absolute high annual urban
population growth rate since 1970.
Table 1 East Asian Urbanization
Country/Region
Percent urban
1970
1980
1990
2000
2010
East Asia (Average)
24.8
27.4
33.3
40.7
48.2
China
17.4
19.6
26.2
34.5
43.0
Japan
71.2
76.2
77.2
78.4
80.6
Republic of Korea
40.7
56.9
73.8
86.2
91.4
Country/Region
Urban population growth rate (Average annual percentage)
1970-75
1980-85
1990-95
2000-05
2010-15
East Asia (Average)
2.4
3.2
3.1
2.6
2.1
China
2.0
4.2
4.0
3.2
2.5
Japan
2.6
0.8
0.4
0.4
0.2
Republic of Korea
5.3
4.0
2.9
1.5
0.8
Apart from the effect of an increase in urban population, the population has also
become highly mobile, which implies households frequently engage in variety of economic
activities in urban areas. An intense mixture of land use represents indication of economic
①
Jones, G, W. (1997), The thorough going urbanization of east and southeast Asia. Asia Pacific Viewpoint,
237-249
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development, providing agriculture, industrial estates, suburban developments and other
uses existing side by side (Jones, 1997).
The high development of urbanization in East Asia is due in a large extent to the
fact that since 50s, Europe and the United States have shifted their production to East and
Southeast regions. This has positively contributed to the fast economy development and
urbanization in these regions because much more factories in the urban areas are needed to
meet the high volume demand in production. Particularly, a so called “Megalopolis②” area
is formed around and between large cities, according to Mcgee (1991). He explains that
these large zones, which are developed around the major cities, can be hardly characterized
as either non-urban or non-rural in conventional terms, and are therefore given a new term “Desakota ③” area. This term was coined from the Indonesian words Desa (village) and
Kota (town), to describe the intense mixture of agricultural and non-agricultural activities
that characterize these regions.
Along with urbanization, the importance of economy in major cities in East Asia is
accelerated. The status of East Asia, in terms of international trade, becomes significant.
Industrial structure has been adjusted in East Asia with the accelerating importance of the
manufacturing industry with respect to national GDP. Due to the fact that East Asia
becomes one of the primary producers of finished products, their economic structure led by
agriculture has changed dramatically. The secondary and tertiary industries’ prosperity
attracts large amount of rural population (Anthony, 1996).
All the above show the process of urbanization in East Asia. Although it is clear
that large cities benefit from urbanization, improving the rural economic situation should
also be taken into consideration. It has been suggested by Jones in 1997 that rural economy
can be improved without migrating to the cities in China, namely “in situ”. It relates to the
transformation of income distribution structure of rural areas. “Leave agriculture but not
②
Megalopolis: an extensive metropolitan area or a long chain of continuous metropolitan areas.
Source: Wikipedia. Retrieved July, 2010, from http://en.wikipedia.org/wiki/Megalopolis_(city_type).
③
Desakota: It comes from and characterizes the original form of large cities in Asia. These cities
generally have peripheral rural areas with high population densities, particularly because of the rice
cultivation which is always labor-intensive.
Source: Wikipedia. Retrieved December, 2010, from http://en.wikipedia.org/wiki/Desakota.
8
the village” can be rephrased as “bring in industrial and other non-agriculture work to the
rural area” (Jones, 1997).
IV. East Asia urbanization propels GDP growth
In the second section, it is clearly shown that economic growth fosters development of
urbanization; one might wonder whether there also shows causal effect the other way
around. Therefore, this section is going to find out the answer to the research question, the
impact of urbanization on GDP growth. In 1982, making comparisons and analysis of GDP
and urbanization levels among 137 countries, a Chinese scholar Zhou drew a positive
relation between urbanization level (independent variables) and the logarithm of GDP (the
dependent variable). Lucas (1988) proposed the hypothesis of city and economic growth
and suggested that urbanization promoted national economic development.
Huge amount of facts reveal that the aforementioned conclusion applies to East
Asia. Since the 1960s, East Asia region has kept swift and sustainable economic growth
and newly-industrializing economies (NIEs) sustain a yearly growth rate above eight
percent. Correspondently, the income standards have been vastly improved. GDP of NIEs
was approximate only 16% of that of the United States in 1960. Nevertheless, this figure
substantially went up to 77% in 1995 (Quilbria, 2002). Data from Malaysia Economy④ and
The Royal Government of Cambodia (2002) show that China as a typical case exhibits
from 1979-2006 a GDP growth rate of 9.66% annually, which exceeds the world level of
three or four percent of that of the corresponding period. As shown in 2006, in the 21st
China Development issue Report, although urban population is only 460 million out of
total Chinese population of 1.3 billion, the GDP and the value of industrial output and the
value of gross retail sale in urban regions consist of larger than 70% of the entire economy.
The quick rate of urbanization in the Republic of Korea is unique. Korea at one time
experienced high development in the economy. In about 30 years’ industrialization, its
④
Data from Malaysia Economy( 2010, March 29). Retrieved from
http://www.malaysiaeconomy.net/world_economy/gross_prod_calc/world_gdp_growth/2010-0729/6546.html
9
GDP has rocketed up to 10,000 USD per capita from less than 100 USD in 60s. During
those 30 years, Korea has kept an annual growth rate at the level of 10%. Thus, it is one of
the highest levels of urbanization and highest economic growth countries (JIN, 2006).
The World Bank also gives a high expectation on the economic development
promoted by urbanization. The World Bank believes the development of economy in East
Asia region rests on sustainable development in urban areas. It is expected that in the next
20 years, the rate of economic contribution by cities in this area will be at least 70%. Any
decision makers understand that urban development is a vital criterion of economic growth
and poverty reduction in the country (The World Bank, 2003).
The World Bank estimates that under the current situation, for a one percent
increase in the level of urbanization, there is a minimum of 1.5 percent increase in GDP.
The main cause lies in the increasing returns to scale resulting from the aggregation of
population and resources (JIN, 2006). More specifically, there are thought to be four
reasons for economic growth that are caused by urbanization.
First of all, as it is explained in the second section, industrialization promotes
development of urbanization. Vice versa, urbanization also plays an important role of
driving further industrialization. Marshall (1920) found out that knowledge spillover is one
of the most important reasons for industrial agglomeration, which is followed by
industrialization. Recent theories of economic growth, including Romer, have stressed the
role of technological and knowledge spillovers in generating growth. Because such
spillovers are particularly effective in cities, where communication between people is more
extensive (Glaeser & Kallal & Scheinkman & Shleifer, 1991), urbanization and economic
growth therefore are connected by knowledge spillover.
Secondly, as the representatives of NIEs, it is found that in East Asia urbanization
progress has been done with the focus on industrialization. Along with the improvement in
population density and scale, service industry has been strongly promoted, which leads to
increase in the diversity of urban development (Li & Shen, 2007). Hence, GDP is pushed
by development of service industry.
Thirdly, urbanization provides economic development with consistent driving force.
Consumption is the most direct and effective push power to the development of economy.
Cities aggregate where high consumption is realized; hence urbanization drives up income
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standard of citizens. On the other hand, urbanization is the process of enhancing attraction
to investment. This is because along with urbanization, investment demand in urban
infrastructure, housing construction and environmental construction investment demand
increases. Investment in transport network construction becomes a big issue. In order to
meet the requirement of consumption and to tackle the unemployment of new urban
population employment, investment in second and third industries is expanded.
Urbanization can also increase the per capita income of the farmers who work in cities,
change their lifestyles and consumption patterns. Basic necessities, consumer durables,
education, insurance and consumer demand grow steadily (Cohen, 2004 & Hoselitz, 1957
& Iimi, 2005). China proposes that 600 billion of consumption will be added every year in
case of one percent of urbanization can be reached during 2001-2015 (Cohen, 2004).
Last but not least, urbanization is conducive to economic restructuring, resulting in
agglomeration economies. Economic structure is essentially a problem of finding out the
optimal allocation of resources. As a development of urbanization, intensive economic
specialization of modern production provides a favorable environment for effective use of
land resources, financial capital, human capital, natural resources, information resources
and public service. South Korea has benefited from urbanization in terms of its economic
restructuring. In particular, it has conducted four major industrial restructurings. After
completion of the four adjustments of industrial structure, Korea was successfully
transformed from an agricultural country to industrial country, from light to heavy industry,
from labor-intensive industries to knowledge and technology-intensive industries (Li & Liu,
2008). This period of rapid development of urbanization corresponds to the 30 years of
rapid urbanization and economic growth in the country. During this period, South Korea
has become one of the world's most rapid economic development countries and creating the
world's rare miracle.
V. East Asia urbanization in the face of poverty
Besides the positive impact that urbanization has on GDP growth, poverty problem in East
Asia is thought to be another important issue that has been influenced by urbanization.
However, different voices regarding the poverty problem appear. It is interesting to notice
11
that the existence of urbanization positively as well as negatively affects poverty. The
following paragraphs will highlight the negative side, which requires much attention.
① Poverty reduction
It is widely accepted that in East Asia, the absolute level of poverty is reduced due to
urbanization because millions of jobs are provided to people, which is led by concentration
of industries and development of third industry. In fact, urban areas are the strong driving
force for economic growth. In most large cities in East Asia, labor force from rural areas
takes a significant part of local labor market, thanks to the higher income structure and
better career path provided rather than elsewhere. Besides this, urban areas are providing
better public education system than rural areas do. Low-skilled workers who continue with
better or higher education offered in urban areas become well- experienced work force.
With the development of productivity, higher salary base in urban areas take place, which
dramatically contribute to the reduction in poverty (Jones, 1997).
② Poverty increase
According to the data published by the World Bank in 2008, East Asia's urban poverty
rate⑤ was 25% in 1998, and is expected to rise to 40% in 2025.
In the rapidly advancing urbanization process in East Asia, unemployment, social
security, the distribution system, social justice and many other problems in social
development have not been effectively resolved and sufficient attention has not paid to the
deprived class. Over time, the social gap between rich and poor continues to expand. Some
poor urban poverty gradually steps from temporary to long-term poverty, and thus a large
social poverty group is formed (Wang, 2009). Several factors jointly contribute to the
existing poverty problem during the process of urbanization.
Urban unemployment is an important reason that causes poverty. Unemployment is
an international problem. Many Western industrialized countries’ experience tells us that
the high unemployment rate is often an important factor which increases social poverty.
Nowadays, urban social and economic development highly depends on new economy that
⑤
According to the financial glossary on CNN.com, the poverty rate is defined as "The percent of the
population living below the poverty line." The poverty line is the amount of money deemed necessary for a
family (which could be defined as just one person) to live. That poverty line is determined by the federal
government. http://articles.cnn.com/2009-03-15/living/financial.glossary_1_credit-score-credit-card-newcredit?_s=PM:LIVING
12
is technology-driven. It has major differences from traditional economy and leads to
unemployment. The traditional manufacturing urban-centered social and economic
development has shifted to electronic information industry and services-focusing economy.
This new transformation not only sets up higher standards in scientific and cultural
knowledge for employees, but leads to a reduction in employment due to widespread use of
high technique. As a consequence, many urban employees with low educational level loose
their chances of employment and become unemployed. In addition, improvement of
agricultural productivity as a result of urbanization and industrialization causes an influx of
large number of rural surplus labors to urban areas, which makes the problem of lack of
urban employment more serious. Unemployment is positively related to the increase of
poverty, as unemployed workers lead to a sharp drop in income. Living standards decline,
eventually falling into poverty which causes the rapid expansion of poor communities in
urban areas (Wang, 2009).
Next to the problem of unemployment, social security imbalance is another reason
why poverty still exists with urbanization, because under rapid development of East Asian
urbanization, the coverage of some national social protections is weak. A perfect social
security system functions as adjusting income allocation, and plays a role in the
coordination of interests and reduction in poverty. However, in some East Asian countries,
it is difficult to adapt to the social security system of urbanization and economic
development. An example that illustrates imperfect social security system is given as
follows. In China, the coverage of social security system is narrow. The benefiters of the
largest population-coverage pension amount to approximately 1.6 million people. The
enterprises’ workers, migrant workers and urban private practitioners generally do not
benefit from any social insurance. Therefore the flooded rural population and unemployed
urban people can not enjoy the basic life, health and employment protection, resulting in a
further trend in widening deprived class (Zhang, 2007).
The third point that needs to be highlighted is the unreasonable income distribution
in East Asia, which is mainly reflected in the increased income gap. The unreasonable
income distribution is considered to be the most important factor which results in the
existence and rapid expansion of urban deprived class. Once more, China is taken as an
example to illustrate the income gap caused by urbanization. After 1978 the income gap in
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China enlarged rapidly. In 2002, The World Bank noted that after reforming and opening
up in 1979, the later deepening of reform did not benefit poor population. In the absence of
providing solutions to other domestic market distortions, these reforms work the other way
around, which means they reflect the broadened income gap (The World Bank, 2008).
During the process of urbanization in East Asia, one vital reason for unreasonable income
distribution is that low labor costs allow poor people to be distributed only a limited small
share of wealth. As a consequence, though people migrate to urban areas, a lot of them
remain poor.
③ Poverty improvement
Drawing from the previously explained poverty problem existing during the process of
urbanization, how to further reduce poverty is a serious and challenging topic. Mrs．Anna
Kaiumulo Tibaiiuka, the executive director of United Nations Human Settlements
Programme (UN—HABlTAT) sounded a warning on 77 country group conference and
China conference in 2007 that we can no longer ignore the plight of slum dwellers. If we
do so, you may not realize the poor for a large part of the Millennium Development Goals.
If we do so, serious social exclusion may occur, with the adverse effects of attendant threat
to peace and security.
Therefore, properly handling the relationship of urbanization and economic
development and trying to reduce the negative impacts are serious problems that
governments must face. Government should pay attention to prevent the ignored equality
and growth-focusing policy bias. In the formulation and implementation of policy,
gradually eliminate the phenomenon of widening income gap which was analyzed in
previous paragraph. In addition, it is also suggested that the government should improve
the educational equity since obtaining education is the only way to improve human capital.
Government should pay attention to expand social security coverage target. By doing so, it
diversifies the sources increasing social security, therefore contributing to the realization of
social equity. Over-urbanization should be noticed by the government in order to prevent a
series of social inequity issues emergent from it (Cohen, 2004).
Through a series policies and measures, it is necessary for government to ease and
solve the pressure caused by urbanization. This is believed to be the core of development of
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economy and the guarantee of reaching healthy and harmonious, in the combination of
urbanization and economic development as well as improvement of social progress.
VI. Conclusion
This paper seeks to find out the impact of urbanization has on economic growth in terms of
GDP growth and poverty in East Asia. It argues in this paper that economic growth is the
foundation of urbanization. The main reasons rely on the fast development in industry,
agriculture and the third sector. Particularly, it is highly related to the process of
industrialization as with development of technical and industrialized society, urban
civilization fast spreads over rural areas, resulting in much faster development in cities.
When refer to East Asia’s rapid undergoing urbanization. This paper suggests that
the shift of production from the United States and European nations to East Asia, high
mobility of labor force due to urbanization and the increase of international trade show the
current status of urbanization in East Asia.
Economic growth with respect to GDP growth is thought to be a positive
consequence in cope with urbanization in East Asia. Knowledge spillovers, being brought
from industrialization and playing a role in urbanization, significantly promote economic
development. In addition, the third industry and high demand in consumption are
developed with urbanization, which contribute to the East Asia’s GDP increase. The
change in economic restructuring followed by urbanization also pushes economic growth.
Poverty problem related to urbanization in East Asia is a debatable topic. Two
opposite impacts on poverty are noticed. From the positive point of view, more rural people
are employed as more jobs are offered. Low skilled workers can benefit from better
education system in urban areas, through which the income standard increases. From
another point of view, some researchers argue that unemployment is a trouble brought by
urbanization because the demand for workforce drops as knowledge spillovers and
increased productivity occur. The imbalanced social protection is not adapted to the vast
development of urbanization in some East Asian countries. Furthermore, unreasonable
income distribution results from low labor costs in the case of people who migrate from
15
rural to urban areas. For the aforementioned two reasons, there is an increase in the poverty
level.
Therefore, properly handling the relationship of urbanization and economic
development and trying to reduce its negative impacts are serious problems that
governments must face.
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