Urbanization - the only solution for a modern India

One of the first chapters in ancient history that are taught to everyone begins with the discussion of ancient civilizations. But what made us call these societies, be it Harappan or Mesopotamian, as civilizations and distinguish them from the earlier agricultural societies? It was the presence of large urban populations and consequently the breakthroughs that these societies achieved ranging from handicraft, sewage to metallurgy. But what is the point that I am trying to put across with this example? The point is that large aggregation of people in one place i.e. urbanization is essential for innovation which in turn drives the development and progress of any society.

If we look at the data, urbanization and growth have a high correlation. Now, it is difficult to tell which factor feeds into the growth of the other but it can be safely stated that when people come together, they bring their ideas together and hence increase the probability of new innovation. It is very much like a popping popcorn, where we do not know which popcorn will pop out first from the pan. But if there are less number of popcorn, we know for sure that there is a very small chance for any of them to pop out. A cursory look at the urbanization map in figure 1 is enough to explain that the most developed countries in the world today are also the ones that are highly urbanized. And all these developed countries have transitioned from rural to urban in the last two centuries and witnessed a tremendous improvement in the living standards of their residents.

Figure 1 Urbanization Map
Now lets look at the performance of India, China and USA for the past 50 years and this trend comes out in a much stronger fashion. If we contrast the three countries, USA was already enough urbanized in the 1960s, while China and India started catching up much later. But China and India make a better comparison. Till 1980s, India was ahead of China both in terms of per capita GDP as well as urbanization. But post Xiaoping’s reforms, we can see China grew rapidly on both indicators, which is reflected from the almost vertical graphs of both the Chinese GDP as well as urban population.

But why do people migrate from villages to the cities? It is because of the better opportunities that cities provide for individual development and that there are very few other occupational choices available in the villages. This is also reflected from the fact that usually the poverty incidence rates are less in urban areas as compared to the rural [Source: UNDESA]. So, cities are better equipped to provide livelihood opportunities. Thus we can say that in general people will have a tendency to migrate to cities as long as cities provide better lifestyle and employment opportunities, which in the long run they should.

GDP per capita (constant 2000 US$)Agriculture (% of GDP)Industry (% of GDP)Services (% of GDP)

Although, as stated above urbanization and growth are highly correlated but we need to explore the channel that actually brings this change. If we look at the table comparing sectoral GDP composition of different economies, we find that agriculture has an almost insignificant share in the economies of rich countries like the USA, UK and Japan. Next comes the middle income economies like Brazil and China, which have a higher share of agriculture when compared to the developed economies but it is still less than India. So, the share of agriculture as a percentage of total GDP falls as a country grows over time. Since the other two sectors i.e. services and industries usually flourish only in cities and have higher productivity growth than agriculture, this explains the close association between growth and urbanization. So, is there some way to accelerate urbanization? Yes, if we can design policies that incentivize more people to migrate towards cities.

Having looked at the role played by the cities for 'wealth generation', now arises the question to compare it against the policy paradigm that is currently famous in India. To understand this paradigm, lets look at one of the statements made by Chief Minister of Bihar Nitish Kumar, "Big farmers and entrepreneurs in Punjab are complaining labour shortage because of decrease in arrival of labourers from Bihar who are getting employment in their native villages itself". Nitish Kumar is one of the progress minded politicians in India and when he makes this statement, it reflects that he thinks it is a positive contribution when the fact is it is quite opposite. Nitish was just an example to show that many of our politicians and intellectuals in India favour policies that provide incentive for poor people to stay in the villages. Although, it is a different fact that most of these people themselves live in the cities.

These policies suppress the natural tendency of people to migrate to cities and also introduce labor market imperfections. But what is the harm of such policies? Apart from the efficiency argument where labor is not allocated in the most efficient sector, the biggest problem with such policies is that they are not sustainable in the long run. Lets try to have a look at some of the reasons. First, growth is driven by industry and services sector and not by agriculture. With the spread of knowledge about medical and other modern amenities, villagers expect similar facilities for themselves as city people. But it is not possible for any rural society to self-sustain these facilities. It would always require a transfer of wealth from urban to rural centres and it is difficult to justify any such permanent transfer for a long period of time.

Second, the average land holding size is extremely small; equal to 1.33 hectares in India and this is one of the biggest hurdles for agricultural modernization in many regions. It not only impedes agricultural growth but is also insufficient for meeting basic human requirements like food and shelter. No surprise that India has such a large number of poor in the villages. Even if we are able to overcome modernization problem and achieve the maximum possible agricultural efficiency, it would still be a small relief in the face of growing population. Not to forget that land reforms and consolidation problem is a topic of huge debate and reason for large number of rural feuds.

Third, such policies invert the social security pyramid i.e. more beneficiaries than contributors. Given the reasons above a rural society would always be dependent on the transfer of wealth from the cities. Since, output fluctuations are an integral part of market economies, we need some kind of policy intervention to smooth out the shocks. A large beneficiary population puts high pressure on economic resources in normal times and reduces the elbowroom that could otherwise have been leveraged during recessions. Hence such urban-to-rural wealth transfer system would not be stable and even a small shock can lead to this top heavy pyramid crumble under its own weight. It does not take too many wrong decisions to throw the economy under a long recession and so we need to form policies that do not take growth for granted.

Now that we know policies that portray a rosy village are unsustainable, we should look at other fruits of growth that are actually denied to rural people through such policies. Education and medical facilities require a lot of investment in infrastructure as well as personnel. These are an example of public goods that should be made available to as many people as possible, but they require huge investment. Urban areas due to their high population densities can provide access to large population over these public goods. For example, it is not possible to sustain big hospitals with state-of-the-art technology if there are less number of people who can access the benefits. This is the reason that often, for basic treatments, people have to travel for long distances and many times the geographical barriers and time delays are just enough for loss of lives. So, we need urbanization because large population aggregations are essential to afford and get best returns on such resource intensive infrastructure investments. This is highly essential for a resource and credit constrained country like India. Also, cities are such huge aggregations where everyone cares about their own work and not caste. This will provide a final blow to this problem, which no amount of affirmative action can help if people continue to reside in the same segregated areas of the villages like their forefathers.

If we leave the people to make their own decisions, I am sure India would transition to an urban economy sooner or later. But is there a scope for government intervention? We definitely do not need any policy initiatives, which can delay this migration phenomenon. But that leaves for the government to play a constructive role in development of cities by helping to remove the coordination problems that arise due to large number of players involved in building new cities. Also, it is needed to develop and enforce the vision needed for avoiding the pitfalls usually seen in case of cities that grow without any careful thought. It is this coordination failure that usually leads to sewer department digging the road immediately after PWD finishes building a new road. At the same time, government can help in optimizing investment across cities and closely monitor real estate bubbles.

To realize the dream of a modern India we need to first clear our minds and accept the reality that a strong and developed India requires urbanization. Any policy, which thwarts this progress, need to be reassessed from a long-term perspective and implemented only if there is no other alternative. This will require serious effort to change our beliefs, as we will need to revisit the story of "Do Bigha Jameen" where the protagonist was almost able to earn enough in three months in Calcutta to prevent the auction of his village land. So next time you watch it, you should not feel sad about the tragic end but think about the earning opportunity that Calcutta provided to Shambhu.


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