What makes some countries urbanize without industrializing?

…. Kuwait, Gabon, Saudi Arabia, Libya, Algeria, Angola and Nigeria are as urbanized as Uruguay, Taiwan, South Korea, Mexico, Malaysia, South Africa and China respectively, and yet the former countries have not industrialized to the same extent as the latter. This raises several questions. Where do the cities in Angola, Nigeria, and the others come from? Why have so many cities in today’s developing world never been factory cities, in stark contrast to the historical experience of today’s developed countries? If these cities have a different origin, does it matter for economic development?

We show that conditional on income per capita, urbanization rates are unrelated to the share of resource exports in GDP or the share of manufacturing and services in GDP. Urbanization is a function of income per capita across all countries.

However, the composition of urban employment differs starkly between resource-exporters and non-exporters, holding constant income levels and urbanization rates. We use IPUMS census micro-data, labor force surveys, and household survey data to recreate the sectoral composition of urban areas for a sub-sample of 88 countries. Using this novel data set, we find that cities in resource-exporting countries are what we term “consumption cities”, with a larger fraction of workers in non-tradable services such as commerce and transportation or personal and government services.1 Cities in countries that do not export significant resources, on the other hand, appear to be “production cities”, with more workers in industrial sectors such as manufacturing or in tradable services like finance.

Source: The Economist Newspaper

Source: The Economist Newspaper

That is Douglas Gollin and co-authors in a working paper on urbanization with and without industrialization. The authors also find that ceteris paribus “consumption cities” also tend to be marked by higher rates of poverty and greater shares of populations living in slums. In short, and to paraphrase the authors, consumption cities of resource exporters are not as welfare-improving as production cities of non-exporters.

This should worry policymakers across the Continent. Africa is urbanizing fast (see image), but without the benefits of mass job creation. Indeed UN Habitat’s 2014 State of African Cities report warns that urbanization in Africa lacks the potential “to deliver on the aspirations of broad based human development and prosperity for all.” The continent’s “consumption cities” will have significant impact on state economies. Increased imports of consumer goods (and food) will put pressure on currencies, with inflationary consequences (Africa imports $81b worth of agricultural produce annually). Tending to the urban sector will likely lead to further taxation of the rural sector a la Bates.

That said, demography might provide a way out. Africa’s population is also expected to balloon over the next five decades. That might just create big enough domestic markets to make it worthwhile for firms to consider locating their manufacturing bases on the continent. Increases in labor costs in east Asia are therefore a welcome trend.

The Long-Run Economic Impact of the Tse Tse Fly in Sub-Saharan Africa

The Tse Tse is estimated to have had substantial effects on precolonial Africa: a one standard deviation increase in the TSI [Tse Tse suitability index] is associated with a 23 percentage point decrease in the likelihood an African ethnic group had large domesticated animals, a nine percentage point decrease in intensive cultivation and a six percentage point reduction in plow use. A one standard deviation increase in the TSI is correlated with a 53 percent reduction in historical population density….

The TSI has a negative correlation with current economic outcomes as measured by satellite light density or the observed cattle distribution in Africa. The modern analysis is performed at the district level and is robust to including country fixed effects. The evidence suggests that the relationship between the TSI and satellite lights is driven by the Tse Tse’s effect on shaping historical institutions, particularly political centralization.

You can find the entire paper here.

HT Tyler Cowen.