Urbanization and Development

Abstract

The level of urbanization and economic development are positively related. An increase in concentration of population at one place yield many positive externalities increasing productivity and efficiency. The relationship between two is extensively researched in many cross country studies and cross country income differentials are examined visa -vis the level and growth of urbanization. The empirical evidences suggested that relationship between urbanization and development changes with changes in the stage of development. India is a comparatively less urbanized country but still around 60.0 percent of total GDP is generated in urban areas. The objective of the present paper is to analyze the relationship between growth in level of urbanization and economic performance in last three decades in India. The paper found that present level of state per capita income has positive correlation with level of urbanization. That is state with high per capita income also has higher level of urbanization and vice-versa. With regard to the relationship between growth of per capita income and growth of level of urbanization, the relationship is found insignificant during decades of 1980 and 1990 but is significant during the last decade of 2000. The paper concludes that association between urbanization and development is getting strong with time.

Full text

International Journal of Research (IJR) Vol-1, Issue-8, September 2014 ISSN 2348-6848
URBANIZATION AND DEVELOPMENT Dr. Laxmi Narayan
P a g e | 901
Urbanization and Development
Dr. Laxmi Narayan
Assistant Professor of Economics, Govt. College Mahendergarh, Haryana
Email: laxmi_narayan70@yahoo.com
Abstract
The level of urbanization and economic
development are positively related. An
increase in concentration of population at
one place yield many positive
externalities increasing productivity and
efficiency. The relationship between two is
extensively researched in many cross
country studies and cross country income
differentials are examined vis-a-vis the
level and growth of urbanization. The
empirical evidences suggested that
relationship between urbanization and
development changes with changes in the
stage of development. India is a
comparatively less urbanized country but
still around 60.0 percent of total GDP is
generated in urban areas. The objective of
the present paper is to analyze the
relationship between growth in level of
urbanization and economic performance
in last three decades in India. The paper
found that present level of state per capita
income has positive correlation with level
of urbanization. That is state with high
per capita income also has higher level of
urbanization and vice-versa. With regard
to the relationship between growth of per
capita income and growth of level of
urbanization, the relationship is found
insignificant during decades of 1980 and
1990 but is significant during the last
decade of 2000. The paper concludes that
association between urbanization and
development is getting strong with time.
Keywords
- Urbanization,
Development, Urbanization and Growth
Introduction
Whether urbanization is result of general
process of economic development or it is
cause of accelerated income growth and
economic development. If urbanization is
result of general economic growth, then
what is the mechanism which transfer
rural population to urban areas and how
urbanization speed up the process of
economic development. Should a
developing country focus on urbanization
as a part of its development strategy? Is
urbanization a necessary condition of
economic growth? These questions has
been raised and debated extensively in
economic literature. Though the two-way
inter-dependence between urbanization
and development is theoretically
established but many empirical studies
reported growth in urbanization even
when there was negligible or negative
growth. Moreover the experiences of
many developing countries suggest that
urbanization posed many social and
economic problems forcing governments
to devote considerable resources in
tackling these problems. Hence, though
urbanization and development are
intricately related but there is no one to
one straight relationship between two. In
case of India, level of urbanization is
quite low as compared to other
developing counties. Many states have
urbanization rate of less than 30 percent
which is lower than the average of rate of
urbanization in 1950 but the process of
urbanization is showing sign of
accelerating. What is the relationship

International Journal of Research (IJR) Vol-1, Issue-8, September 2014 ISSN 2348-6848
URBANIZATION AND DEVELOPMENT Dr. Laxmi Narayan
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between urbanization and growth of per
capita income in India is an issue worth
examination. Keeping this in view present
paper attempts to analyses the relationship
between urbanization and development by
comparing changes in rate of urbanization
with changes in economic development of
the state. Paper compares the decadal
growth rate of income with the decadal
growth of urbanization to understand the
relationship between urbanization and
economic development in India.
Objectives
The main aim of the paper is to
investigate the relationship between
urbanization and development in India by
studying the inter-state differences in both.
In this endeavor, paper analyzed trends in
level of urbanization across Indian states,
growth in the level of urbanization and
growth in per capita income.
Methodology
The paper uses data on level of
urbanization from various rounds of
population census published by Registrar
General of India. Data pertaining to
growth of state per capita income are
taken from RBI Handbook of Statistics on
Indian Econmy-2012-13. The paper
compares present level of urbanization
with level of per capita income across
Indian states and using rank correlation
between both. To assess the relationship
between growth of level of urbanization
and rate of growth per capita income,
correlation coefficient for three decades in
calculated.
Review of Literature
Urbanization is generally associated with
specialization, industrialization and
development. Urbanization is generally
seems as territorial shift in response to
structural changes in the economy. With
economic development the structure of
output shift from low productivity to high
productivity sectors as a result
employment structure also changes with
redistribution among sectors. As different
geographical regions are suitable for a
particular type of production, this result in
territorial redistribution of labour force.
The labour force physically gets bunched
up in cities where demand for the
products is created or where positive
production externalities are maximized.
Urbanization can be defined "as a process
which reveals itself through temporal,
spatial and sectoral changes in the
demographic, social, economic,
technological and environmental aspects
of life in a given society. Urbanization is a
progressive concentration of population
in urban unit" (Kingsley Davis-1965).
These changes manifest themselves in the
increasing concentration of population in
human settlements, increasing
participation of the people in the
secondary and tertiary production
activities, and in the progressive adoption
of certain social traits which are not
typical of traditional rural societies. A
distinctive division of labour, technology
based production of goods, trade of a
variety of goods and service, high level of
spatial and economic interaction, and
relatively high density and diversity of
population are basic tenets associated
with urbanization (Sharma 2010). The
distinction between town and country is
not merely a distinction based on the
nature of settlements, it is a distinction
rooted in the economic structure and
social relations of production and
reproduction, and in the processes of
social and political consciousness and its
articulation.
Hariss (1960) observed that
correlation between the size and growth
of urban population and level and rate of
change in national output vary
considerably between Low, High and
Middle Income countries, and between

International Journal of Research (IJR) Vol-1, Issue-8, September 2014 ISSN 2348-6848
URBANIZATION AND DEVELOPMENT Dr. Laxmi Narayan
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countries experiencing high and low eco
nomic growth. This is also evident from
available empirical evidences. Many
empirical studies reported positive
relationship between urbanization level
and per capita income (Chen et al., 2014,
Friedman, 2006, Henderson, 2003; Fay
and Opal, 2000 and Polese, 2005).
Daniel (2007) using co-integration and
causality tests investigated the
relationship between urbanization and
economic growth for 28 countries for the
period 1950-2000 and found a long-run
stable relationship between urbanization
and economic growth. The Granger
causality tests indicate that the
urbanization Granger-causes the
economic growth for developing nations,
while the opposite holds for developed
nations. Thus, causal relationship between
the two variables is dependent upon the
economic development status of a country.
Glease (2000), Krugman (2000) and
Quigley (2008) demonstrated positive link
between productivity and agglomeration
of economic activities in cities. Quigley
(2008) emphasize that it is not only the
internal scale economies that urbanization
provide to the producers but it is external
effects, spillovers, and external economies
of scale that have become more important
with increased industrialization, technical
progress, and economic development.
These external effects result into
productivity gains arising from
specialization; from transaction costs and
complementarities in production; from
education, knowledge, and mimicking;
and from proximity to large numbers of
other economic actors.
Chen et al. (2014) in a landmark study
found that in medium to short period
urbanization has little effect on economic
growth and we have enough period of
urbanization with no parallel growth in
economic growth. Hence, it cannot be
stated as a rule that higher speed of
urbanization automatically lead to more
rapid increase in economic growth.
Though their study found positive and
high correlation between urbanization and
economic growth in long term due to
same evolutionary time trend followed by
both processes. The study concluded that
there are sufficient evidence to believe
that there is no correlation between
urbanization speed and economic growth
rate at the global level. These findings
support the findings that no linear
relationship between urbanization and
economic growth (Hariss, 1990; Turok
and McGranahan, 2013). Abdel-Rahman
et al. (2006) based on time series analyses
reported that urbanization has no
straightforward link to economic
development. The urbanization per se
does not automatically lead to increase in
per capita income and the success of
urbanization to induce economic growth
depends on removing barriers to rural-
urban migration, supporting policies,
enabling markets and infrastructural
investment (Turok and McGranahan,
2013). Tolley (1987) also shows that
conditions in individual countries play a
significant part in urbanization. The study
concluded that one of the major
determinants of urbanization is the degree
to which countries are able to foster
growth of urban productivity and
countries lagging in growth of agricultural
productivity are likely to face added
pressure on urbanization.
Pattern of urbanization influences
economic growth. Endogenous growth
theory (Romer, 1986 and Lucas 1988)
recognized that productivity gains due to
augmentation of human capital by
accumulation of knowledge are one of the
major factors influencing economic
growth. Urbanization enables better
quality of human capital and proper use of
knowledge spillovers. Lucas’s (2004,
2007) models explicitly consider how
urbanization affects the growth process
mainly through the enhanced flow of
ideas and knowledge attributable to
agglomeration in cities. Rosenthal and
Strange (2004) provide a comprehensive

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URBANIZATION AND DEVELOPMENT Dr. Laxmi Narayan
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survey of the literature on the presence of
agglomeration economies particularly in
developed countries. Advantages
associated with economies of scale
motivates firm to concentrate
geographically so that benefits of
agglomeration economies can be fully
reaped.
India: Urbanization and
Development
The urban population in India was only
25.8 million constituting 10.8 per cent of
total population in 1901, which increased
to 377 million comprising 31.16 per cent
of total population in 2011. The
contribution of urban sector has shown
significant increase since independence.
The contribution of urban sector to India's
GDP has shown continuous increase
highlighting importance of urban areas in
economic growth. In 1950-51contribution
of urban GDP in total GDP was only 29
per cent, which increased to 47 per cent in
1980-81 and 62-63 percent in 2009
(Government of India, 2009).
Table-1 shows that rate of urbanization
has shown increasing trend over the
period. The rate of urbanization grew
speedily during the decade 1941-51 when
the annual exponential urban growth rate
was recorded as high as 3.74 per cent due
to partition of the country in 1947
(Census of India 1991). The decline in the
growth rate during 1951-61 was an
artifact of the change in definition of
urban resorted in 1961 census. As a result
about 800 towns have been declassified in
1961 census (Mohan and Pant 1982). The
peak in urban growth was observed
during 1971-81 when the annual
exponential urban growth rate was 3.79
percent per annum. After that it has
slowed down and was recorded 2.77
percent per annum for the decade 2001-
2011.
Table-1: Urbanization Trends in India
Census
Year
No. of
UA/Towns
Urban
Population
(millions)
Urbanization
Percent
1901 1827 25.85 10.84
1911 1815 25.94 10.29
1921 1949 28.07 11.17
1931 2072 33.46 11.99
1941 2250 44.15 13.86
1951 2843 62.44 17.29
1961 2365 78.94 17.97
1971 2590 109.11 19.91
1981 3378 159.46 23.34
1991 3768 217.18 25.72
2001 5161 286.12 27.86
2011 7935 377.11 31.16
Source: Figures up to 1991 are taken from Census
of India 1991, Paper 1 of 1993; Census of
India 2001 and 2011, Final Population
Totals, Office of the Registrar General and
Census Commissioner, India, New Delhi.
Chandrasekhar and Sharma (2014)
emphasized that there is compelling
evidence to suggest that estimates of rate
of urbanization reported by census are
underestimation due to definition adopted
in census. The level of urbanization is a
function of the size of peripheral urban
areas which are considered as rural in
official data.
It is for the first time in 2011 that the
urban areas recorded higher increase in
absolute number of population as
compared to that in rural population. The
rate of rural population growth has
declined much faster during 2001-2011
compared to the earlier decades. Urban-
rural population growth differential is
critical to the process of urbanization and
it has increased from about 1% per annum
during 1991-2001 to 1.61% per annum
during 2001-2011(table-2).

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URBANIZATION AND DEVELOPMENT Dr. Laxmi Narayan
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Table-2: Urban-Rural Population Growth
Differentials (1971-2011)
Decade Rural Urban
Urban-Rural
Growth
Differentials
Rate (in %)
1971-1981 1.76 3.79 2.03
1981-1991 1.80 3.09 1.29
1991-2001 1.69 2.76 1.06
2001-2011 1.15 2.77 1.61
Source: Census of India, various years.
Natural increase and rural-urban
migration has been main source of
urbanisation in India. During 2001-2011,
the push to urban population has come in
from rural to urban conversion and rural-
urban migration (Table-3).
Table – 3 : Components of Urban Population Growth
Components of Growth
1961
-
71
1971
-
81
1981
-
91
1991
-
2001
2001
-
11
Natural Increase
64.6 51.3 61.3 59.4 44.1
New Towns
13.8 14.8 9.4 6.2 15.8
Expansion of Urban
Areas
2.9 14.2 7.6 13.0 15.9
Rural
-
Urban Migration
18.7 19.6 21.7 21.0 24.2
Source:
Ministry of Housing and Urban Poverty
Alleviation, Government of India,
Urbanization
and Poverty in India: A
Statistical Compendium, 2010, and C
ensus
2011.
Figure 1: Percentage Distribution of Components
of Urban Population Growth
Source: Plotted from data given in Table-3
Data presented in Table-4 shows the level
of urbanization and per capita state
domestic product in column-3 and 4. Data
shows that rank correlation between level
of Urbanization and level of per capita
income is 0.5768 indicating relationship
between both as value of t (5.196) is
statistically significant. The rank analysis
of present level of urbanization with level
of per capita income shows close positive
relationship between both though no one
to one correspondence between two. For
example, Haryana is ranked 10th in level
of urbanization but is ranked higher at 5th
in term of level of income. Similarly
Sikkim is ranked 19th in the level of
urbanization but is ranked 03rd in term of
growth of per capita income and Uttar
Pradesh which ranked 24th in term of
level of urbanization is ranked higher at
10th place. So no case to case
concordance could be found between both
but high degree of correlation suggests
significant close relationship between two.
The findings are in line with the finding
of some previous studies(Chen, 2014;
Hariss, 1990; Turok and McGranahan,
2013) indicating that there is no straight

International Journal of Research (IJR) Vol-1, Issue-8, September 2014 ISSN 2348-6848
URBANIZATION AND DEVELOPMENT Dr. Laxmi Narayan
P a g e | 906
relationship between urbanization speed
and economic growth rate at least during
short to medium period. The urbanization
of its own cannot automatically led to
development as it depends on many
enabling factors.
The correlation coefficient between
growth of rate of urbanization and state
per capita gross domestic product is very
low (0.210) for the period 1981-82 to
1990-91 and is even negative for period
1991-92 to 2000-01. But for the last
decade from 2001-02 to 2011-12, the
correlation coefficient shows significant
relation between urbanization and
development. Thus, we found that
relationship between both is turning
statistically significant though it does not
tell us direction of the relationship that is
whether urbanization resulted in increase
in per capita income or increased income
resulted in growth of urbanization. In a
recent study Daniel (2013) found that in
case of India urbanization Granger causes
economic growth.
Conclusions and
Suggestions
The paper analyzed changes in rate of
urbanization and rate of growth of per
capita state domestic product for the last
three decade using data for states in India.
We found that association between
urbanization and development is very
weak for most of the period though we
found a significant positive relationship
for the last decade. Based on the results of
the present study and previous recent
studies, we may say that association
between urbanization and development is
turning significant. The future growth in
state per capita income will be
significantly influenced by the state
ability to effectively manage urbanization
in their respective states. Our study
confirmed the findings of earlier studies
that no straightforward relationship exists
between urbanization and development.
Table - 4: Level of Urbanization and Growth of
Urban Population Across States and Union Territories
2010-11
1981–91
1991–01
2001-11
States
Level of
Urb.
Per capita
Income (PCI) Urb. PCI Urb. PCI Urb. PCI
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
1
Andhra Pradesh 33.5 (11) 39434 (14) 3.6 4.30 1.4 4.13 2.1 6.54
2
Arunachal Pradesh 22.7 (23) 34366 (18) 9.3 5.70 7.0 3.12 1.1 5.47
3
Assam 14.1 (27) 21793 (27) 3.3 1.93 3.1 0.51 1.0 4.18
4
Bihar 11.3 (28) 12100 (29) 2.7 2.85 2.6 1.02 0.7 6.24
5
Chattisgarh 23.2 (22) 25788 (22) NA NA 3.1 NA 1.5 7.11
6
Delhi 97.5 (01) 108876 (01) 3.8 3.16 4.1 4.36 0.5 7.34
7
Goa 62.2 (02) 104445 (02) 4.0 4.84 3.3 5.10 2.2 6.43
8
Gujarat 42.6 (07) 53789 (06) 2.9 3.93 2.8 3.95 1.3 8.92
9
Haryana 34.8 (10) 59140 (05) 3.6 4.28 4.1 2.39 1.8 7.36
10
Himachal Pradesh 10 (29) 46821 (10) 3.1 2.97 2.8 4.32 0.2 5.03
11
Jammu & Kashmir 27.2 (17) 27881 (20) 3.4 0.20 3.4 1.68 0.9 3.77
12
Jharkhand 24.1 (21) 24330 (23) NA NA 2.6 NA 0.8 6.08
13
Karnataka 38.6 (8) 40332 (13) 2.6 3.06 2.5 5.09 1.3 5.71
14
Kerala 47.7 (5) 49391 (08) 4.8 1.97 0.7 4.45 6.3 7.54

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15
Madhya Pradesh 27.6 (16) 22091 (26) 3.7 2.42 2.7 1.75 0.3 4.25
16
Maharashtra 45.2 (06) 59735 (04) 3.3 3.73 3.0 3.77 0.6 6.17
17
Manipur 30.2 (14) 22867 (25) 3.0 2.08 1.2 2.03 2.4 3.94
18
Meghalaya 20.1 (25) 35191 (17) 3.1 2.52 3.2 2.88 0.2 6.29
19
Mizoram 51.5 (03) 36732 (16) 9.6 NA 3.3 NA 0.4 4.43
20
Nagaland 29 (15) 42511 (12) 5.6 3.94 5.3 1.78 5.0 NA
21
Orissa 16.7 (26) 23875 (24) 3.1 1.14 2.6 2.50 1.1 6.62
22
Punjab 37.5 (09) 44783 (11) 2.6 3.42 3.2 2.47 1.0 3.28
23
Rajasthan 24.9 (20) 27625 (21) 3.3 5.61 2.7 2.15 0.6 6.82
24
Sikkim 25 (19) 64693 (03) –3.2 8.02 4.8 NA 8.4 13.48
25
Tamil Nadu 48.4 (04) 51117 (07) 1.8 4.23 3.6 4.95 1.0 6.12
26
Tripura 26.2 (18) 36826 (15) 6.2 2.44 2.5 5.39 4.4 6.75
27
Uttar Pradesh 22.3 (24) 48240 (09) 3.3 2.65 2.8 1.00 0.7 5.36
28
Uttaranchal 30.6 (13) 17378 (28) NA NA 2.8 NA 1.8 6.29
29
West Bengal 31.9 (12) 32299 (19) 2.5 1.98 1.8 4.76 1.3 5.60
Correlation Coefficient ® Rank Correlation = 0.5768
r = 0.210 r =
-0.156
r =
0.681
Source:
Calculated from the data obtained from Various rounds of Census of India and RBI
handbook of Indian Economy
Note:
The value in parenthesis in column 3 and 4 are the respective rank of the state.
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