Cities and Poverty

Some 285 million Indians, or 29% of its population, live in its over 5161 towns and cities. In the Eleventh Plan period (2007-12), 36.8 million people are expected to be added to the urban areas. Rapid urbanization and managing its consequences is one of the most important challenges facing Governments across the world, especially in the developing world. This process has triggered off a lively debate about its impact on increasing incomes and reducing poverty.

There are interesting views on the issue of rural-urban poverty. Quoting the latest CSO figures, a group of economists of the Future Group, have come up with a report "Is Urban Growth Good For Rural India?", which claims to debunk some closely held notions of the urban-rural divide in the Indian economy. It argues against three such myths

1. Faster economic growth in urban areas is driving the urbanization. But India’s rural economy has grown on average by 7.3% year-over-year over the past decade, against 5.4% in the urban sector and per capita rural income growth has been more than double that of urban India. The rural economy accounted for 51% of India’s national domestic product in 2005-06, up from 49% in 2000 and 46% in 1993-94.
2. Rural India is still an agricultural economy. Agriculture formed just over half of the rural economy in 2000, down from 64% in the early 1980s and 72% in 1971. Services accounted for 28% of rural economy in 2000, up from 21% in 1981, while manufacturing, utilities and construction have nearly doubled their share in the rural economy to 18% in 2000 from just under 10% in 1971. The growth has been led, in large part, by three industries: manufacturing; construction; and trade, hotels and restaurants.
3. Rural-urban inequality is on the rise. India’s urban-rural income gap, the ratio of mean urban to rural incomes, diminished to 2.8 in 2000 from 3.3 in the early 1990s. Real rural household consumption expenditure grew by 8% against 4% in urban India in the 2000-05 period.

They argue that the Government have hitherto focussed on rural inequality and rural investments, to the exclusion of the urban areas. Concluding that it is wrong to see urban and rural growth as separate activities, they say, "Our study suggests that a Rs100 increase in urban consumption could lead to an increase in rural household incomes of up to Rs39—no small feedback, and a strong counter to the popular perception of “two Indias”. If India’s cities keep growing at their current pace, in aggregate 6.3 million non-farm jobs in rural areas (more than the total number of new professional services jobs projected over the next 10 years) and $91 billion in real rural household income could be created over the next decade. Urban consumption also generates non-farm employment. A 10% increase in urban expenditure is associated with a 4.8% increase in rural non-farm employment."

In another interesting study, marshalling an impressive array of newly compiled statistics, Martin Ravallion of the IMF writing in the Fund's quarterly magazine, Finance & Development, argues that urbanization may be contributing towards global poverty reduction. He draws the following conclusions on global poverty
1. The incidence of absolute poverty is appreciably higher in rural areas. Poverty in rural areas is markedly higher than in urban areas, despite the urban poor facing much higher cost of living. While 69.7% of the rural poor lived on less than $2 a day in 2002, compared to only 33.7% of urban poor.
2. Urban areas share of the total global poor is rising slowly. It rose from 23.6% to 26.2% in the 1993-2002 period. ($2 a day poverty line)
3. The poor are urbanizing faster than the population as a whole, reflecting a lower pace of poverty reduction in urban areas.
4. Urbanization is a generally positive factor in overall poverty reduction. More urbanized developing countries tend to have lower poverty rates.

What is the impact of rapid urbanization through migration from rural areas, on the lives of rural poor and rural poverty in particular? Martin Ravallion argues that the rural poor migrating to urban areas contribute towards reducing rural poverty by sending remittances back home and by reducing the demand and hence competition for rural jobs. Indeed he shows evidence to prove that urbanization has done more to reduce rural than urban poverty. This is interesting in that conventional wisdom would expect that human resource depletion from rural areas, especially those more skilled and educated, would have impoverished the rural areas. But here it appears that the negative effect of human resource depletion is more than offset by the aforementioned positive effects of migration.

He says, "Rural poverty measures tend to fall more rapidly in countries with higher rates of population urbanization. Urbanization appears to be having a compositional effect on the urban population, in that the new urban residents tend to be poorer than the previous urban population. Naturally, this slows the pace of urban poverty reduction, even though poverty is falling in rural areas and for the population as a whole."

What are the implications for Government policies on reduction of urban poverty? If the evidence of both studies is taken as conclusive, we have interesting learnings. If Ravallion's findings are taken as representative of Indian cities too, then it may not be incorrect to claim that faster economic growth in cities is indeed driving urbanization. The higher economic growth of the rural areas, as compared to the cities, may be more of a statistical sleight of hand than any profound conclusion. As the Ravallion study shows, the compositional effect arising from the migration of the poor into rural areas and the consequent decrease of the poor from the rural areas, coupled with the significant transfer of wealth from the urban to rural areas by way of remittances, work towards boosting rural growth statistics while simultaneously under playing urban growth.

Urbanization has an undoubted positive impact on poverty reduction. Not only does it improve the conditions of the migrating poor (at a macro level, the migrants migrate because they are able to access better opportunities in the cities), but it also contributes to the growth of the rural economy. Urban share of the total poor may continue to increase in the coming days, as the poorest from the rural areas find it increasingly attractive to migrate to the cities.

The Fortune Group study also highlights the increasingly prominent role of manufacturing, construction and services in even rural growth. Like urban growth, these sectors too require critical investments in infrastructure like roads, electricity, telecommunications, water, airports and ports for their sustainable long term growth prospects. Hitherto, Government focus in rural economic growth have been confined to or dominated by agriculture related infrastructure investments. While this is undoubtedly important, the increasing importance of other general infrastructure should be kept in mind.

Both studies reveal that migration from rural areas have important positive externalities and economic multiplier, and hence should be incentivized. However, we need to be careful that this migration does not impose costs which overburdens and ultimately derails the urban growth engine. Therefore there has to be a delicate balance between the migration from rural areas and the ability of the City's physical and socio-economic infrastructure to sustain it. Policies tailored to encourage the economic growth of our cities should factor in this dimension. We should not end up killing the proverbial goose that lays the golden eggs!