Does urbanization affect rural poverty? Evidence from Indian Districts Massimiliano Calì World Bank...
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![Page 1: Does urbanization affect rural poverty? Evidence from Indian Districts Massimiliano Calì World Bank Urbanization and poverty reduction conference World.](https://reader038.fdocuments.net/reader038/viewer/2022102808/56649d955503460f94a7d76f/html5/thumbnails/1.jpg)
Does urbanization affect rural poverty?Evidence from Indian Districts
Massimiliano Calì World Bank
Urbanization and poverty reduction conference World Bank, Washington DC, 13-14 May 2013
Joint with Carlo Menon, OECD
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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)
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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 stock of world’s rural poor (36%)
• Expected to add a further 500 mln urban dwellers by 2050
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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
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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)
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• 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.
Economic linkages (2/2)
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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%)
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ΔUrban pop and Δrural poverty (1983-99)
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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)
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Empirical specification
where H is a measure of rural poverty in district d at time t, α is
district fixed effects, λ is 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.
Baseline estimation via reduced form controlling for direct effects of
urbanisation and for other determinants of rural poverty:
dtdtUjdtstd
Rdt XPH
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‘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
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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
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Results (1) (2) (3) (4) (5) Dep. variable Rural poverty (headcount ratio)
Period 1983-99
Urban pop.t-2 (millions) -0.074***
(0.024) Urb. pop. non poor.t-2 (mil.)
Rural pop. (millions) -0.010 (0.015)
Scheduled caste (share)
Rural pop 15-34 age (share)
Rural lit 15-34 (% in 15-34)
Rural lit 15_34 x Post-1993
Urban poverty (hc. ratio)
Observations 973 R-sq. (within) 0.647 No. of districts 355
1983-99 1983-99
-0.068*** (0.023)
-0.047*** (0.017)
-0.004 -0.004 (0.014) (0.014)
0.338 0.349 (0.290) (0.289)
-3.456*** -3.458*** (0.940) (0.944)
-0.732 -0.740 (0.654) (0.657)
0.241*** 0.243*** (0.082) (0.083)
0.316*** (0.063)
973 973 0.681 0.681 355 355
1983-93 1983-93
-0.101 -0.109* (0.063) (0.058)
0.012 (0.020)
0.374 (0.475)
-3.189** (1.478)
-3.757*** (0.938)
0.012 (0.020)
0.382*** (0.104)
667 667 0.619 0.671 355 355
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Robustness (1) (2) (3) (4) (5) Dep var. Rural poverty (headcount ratio)
Period 1983-99 1983-99 1983-99 1983-99 1983-99
Urban pop.t-2 (millions) -0.077*** -0.068*** -0.039
(0.025) (0.024) (0.057)
Urban share t-2 -0.051
(0.157)
Urban pop. of bord. districts (mln)
0.007
(0.057)
Urban pop. cities >20k (millions)t-2
-0.053**
(0.026)
Urban pop. squared t-2 (millions)
-0.007
(0.010)
Basic controls YES YES YES YES YES Agricultural productivity YES NO NO NO NO Observations 762 973 965 961 973 R-sq. (within) 0.669 0.679 0.681 0.686 0.681 No. of districts 274 355 349 355 355
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IV results (1) (2) (3) (4) (5)
Period 1983-99 1983-99 1983-99 1983-99 1983-93
Urban pop. (millions)t-2
-0.120*** -0.125*** -0.136** -0.231**
(0.037) (0.046) (0.056) (0.108)
Urb. pop. non poor.t-2 (mil.)
-0.089***
(0.032)
Basic controls NO YES YES YES YES
Observations 926 926 846 926 620 R-sq. (within) 0.006 0.101 0.111 0.101 0.135 Nr. of districts 311 311 284 311 310
First Stage
Migrants from other states
3.433*** 3.337*** 3.796*** 3.307***
(0.488) (0.442) (0.522) (0.444)
Predicted urban population
1.196*** 1.133*** 1.289*** 1.761*** 1.127***
(0.153) (0.146) (0.184) (0.207) (0.147)
Manuf. Shr1981 x post1991
0.816**
(0.395)
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What drives the effects? (1) (2) (3) (4) (5) (6) (7)
Rur pov Rur pov AreaPC Non farm shr
Intra rur-urb mig
Rice area Pulse area
Urban pop. (millions)t-2
-0.068** 0.012 (0.028) (0.057) Urban pop.
(millions) 0.079* 0.016* 0.013*** 19.763** -15.227*
(0.042) (0.010) (0.004) (7.991) (9.050)
Cultivated area per capita t-1
-0.071*
(0.040)
Non farm non HH share t-2
1.212***
(0.376)
Non farm non HH share t-2 squared
-1.918***
(0.446)
Intra district rural-urban migrants t-2
-1.046
(0.673)
Rice area sharet-2
0.552**
(0.252)
Rice area x urb. pop. (mln)t-2
-0.300
(0.209)
Pulse area sharet-2
0.169
(0.187)
Pulse area x urb. pop. (mln)t-2
-0.644
(0.514)
74% of the effect
19%
4%
3%
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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
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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?