47061 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Urbanization and Growth Michael Spence Patricia Clarke Annez Robert M. Buckley Editors Public Disclosure Authorized Urbanization and Growth Commission on Growth and Development Urbanization and Growth Edited by Michael Spence, Patricia Clarke Annez, and Robert M. Buckley Contributions by Michael Spence Patricia Clarke Annez and Robert M. Buckley Richard Arnott Gilles Duranton Dwight M. Jaffee Sukkoo Kim John M. Quigley Anthony J. Venables COMMISSION ON GROWTH AND DEVELOPMENT © 2009 The International Bank for Reconstruction and Development / The World Bank On behalf of the Commission on Growth and Development 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org www.growthcommission.org E-mail: [email protected] [email protected] All rights reserved 1 2 3 4 12 11 10 09 This volume is a product of the Commission on Growth and Development, which is sponsored by the following organizations: Australian Agency for International Development (AusAID) Dutch Ministry of Foreign Affairs Swedish International Development Cooperation Agency (SIDA) U.K. Department of International Development (DFID) The William and Flora Hewlett Foundation The World Bank Group The fi ndings, interpretations, and conclusions expressed herein do not necessarily refl ect the views of the sponsoring organizations or the governments they represent. The sponsoring organizations do not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the sponsoring organizations concerning the legal status of any territory or the endorsement or acceptance of such boundaries. All queries on rights and licenses, including subsidiary rights, should be addressed to the Offi ce of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. ISBN: 978-0-8213-7573-0 eISBN: 978-0-8213-7574-7 DOI: 10.1596/978-0-8213-7573-0 Library of Congress Cataloging-in-Publication Data Urbanization and growth / edited by Michael Spence, Patricia Clarke Annez, and Robert M. Buckley. p. cm. Includes bibliographical references and index. ISBN 978-0-8213-7573-0 — ISBN 978-0-8213-7574-7 (electronic) 1. Urban economics. 2. Urbanization—Economic aspects. 3. Cities and towns—Growth. I. Spence, Michael. II. Annez, Patricia Clarke. III. Buckley, Robert M. HT321.U338 2008 330.9173’2—dc22 2008044060 Cover design: Naylor Design Contents Preface ix Workshop Participants xvii Chapter Summaries xix About the Editors and Contributors xxiii Acknowledgments xxvii Abbreviations xxix 1 Urbanization and Growth: Setting the Context 1 Patricia Clarke Annez and Robert M. Buckley 2 Rethinking Economic Growth in a Globalizing World: An Economic Geography Lens 47 Anthony J. Venables 3 Are Cities Engines of Growth and Prosperity for Developing Countries? 67 Gilles Duranton 4 Urbanization, Agglomeration, and Economic Development 115 John M. Quigley Contents v 5 Spatial Inequality and Economic Development: Theories, Facts, and Policies 133 Sukkoo Kim 6 Housing Policy in Developing Countries: The Importance of the Informal Economy 167 Richard Arnott 7 The U.S. Subprime Mortgage Crisis: Issues Raised and Lessons Learned 197 Dwight M. Jaffee Index 237 Boxes 1.1 The Role of Finance in Cleaning Up Britain’s “Killer Cities” in the 19th Century 10 1.2 How Baron Haussman Financed the Modernization of Paris 29 Figures 1.1 Urbanization and Per Capita GDP across Countries, 2000 (1996 dollars) 3 1.2 Urbanization and Per Capita GDP in the United States, 1880–2006 4 1.3 Urbanization and Per Capita GDP in China, 1960–2004 5 1.4 Rural Population in China and India, 1980–2006 5 1.5 Per Capita Income in China and India, 1980–2006 5 1.6 Urbanization and Per Capita GDP in Brazil, 1960–2003 6 1.7 Urbanization and Per Capita GDP in Kenya, 1960–2003 7 1.8 Urban and Rural Poverty Headcount in East Asia, 1993–2002 9 1.9 Per Capita GDP, Urban Share of Population, and Poverty Headcount in East Asia, 1993–2002 9 1.10 Urban and Rural Poverty Headcount in Sub-Saharan Africa, 1993–2002 9 1.11 Per Capita GDP, Urban Share of Population, and Poverty Headcount in Sub-Saharan Africa, 1993–2002 9 1.12 Growth Rates in Agriculture, Manufacturing, and Service Sectors in Selected High-Growth Economies 12 1.13 Income Advantages of Coastal Metropolitan Regions in China, 2000 17 vi Contents A2.1 Urbanization and Per Capita GDP across Countries, 1960–2000 (1996 Dollars) 37 A3.1 Poverty Headcount in Latin America and the Caribbean, 1993–2002 39 A3.2 Poverty Headcount, Urban Share of Population, and Per Capita GDP Indexes for Latin America and the Caribbean, 1993–2002 39 A3.3 Poverty Headcount in South Asia, 1993–2002 39 A3.4 Poverty Headcount, Urban Share of Population, and Per Capita GDP Indexes for South Asia, 1993–2002 39 A3.5 Poverty Headcount in Europe and Central Asia, 1993–2002 40 A3.6 Poverty Headcount, Urban Share of Population, and Per Capita GDP Indexes for Europe and Central Asia, 1993–2002 40 A3.7 Poverty Headcount in the Middle East and North Africa, 1993–2002 40 A3.8 Poverty Headcount, Urban Share of Population, and Per Capita GDP Indexes for the Middle East and North Africa, 1993–2002 40 2.1 GDP Per Capita and Foreign Market Access 53 2.2 Changes in World Income Distribution 56 3.1 Baseline Case for Typical City 71 3.2 Welfare Analysis 76 3.3 Primate Cities Favoritism 87 3.4 Internal Market Access 89 3.5 Harris-Todaro Migrations 92 3.6 Dual Housing Sector 95 3.7 Learning in Cities 97 3.8 Growth in Cities 101 7.1 Ratio of Mortgage Debt Outstanding to GDP 203 7.2 Subprime Mortgage Originations, Annual Volume and Percent of Total 205 7.3 All Loans Past Due as Percentage of Category Total Outstanding 210 7.4 Foreclosures Started during Quarter as Percent of Category Total Outstanding 211 7.5 Loans in Foreclosure as Percent of Category Total Outstanding 212 Contents vii 7.6 Subprime Delinquency Rate 60+ Days, by Age and Year of Origination 213 7.7 The OFHEO House Price Index, Quarterly Changes at Annual Rates 214 7.8 Non-Mortgage, Asset-Backed Securities Outstanding 219 7.9 Securitization Rates for Mortgage Categories 220 Tables 1.1 Percentage of Annual Urban Population Growth Attributable to Internal Migration, by Region 21 A1.1 Government Views on the Spatial Distribution of the Population: 1976, 1986, 1996, and 2007 33 A1.2 Government Policies on Internal Migration into Urban Agglomerations: 1976, 1986, 1996, and 2007 35 6.1 GNP Per Capita and Informal Employment by City Development Index, 1998 168 6.2 Rates of Owner Occupancy, Unauthorized Housing, and Squatter Housing by Country Income Group, 1990 169 7.1 Subprime Loans Originated for Home Purchase 206 7.2 Home Sales, Total and Attributable to Subprime Loans 207 7.3A Owner Occupancy Rates 208 7.3B Computing Home Purchases 209 7.4 Subprime Borrower and Subprime Loan Observable Factors 213 viii Contents Preface The Commission on Growth and Development was established in April 2006 as a response to two insights: we do not talk about growth enough, and when we do, we speak with too much confi dence. Too often, people overlook economic growth when thinking about how to tackle the world’s most pressing problems, such as poverty, illiteracy, income inequality, unemployment, and pollution. At the same time, our understanding of eco- nomic growth is less defi nitive than commonly thought—even though advice is often given to developing countries with great confi dence. Conse- quently, the Commission’s mandate is to “take stock of the state of theo- retical and empirical knowledge on economic growth with a view to drawing implications for policy for the current and next generation of policy makers.” To help assess the state of knowledge, the Commission invited lead- ing academics and policy makers from around the world to a series of 12 workshops, held in 2007 and 2008 in Washington, D.C., New York, and New Haven, and commissioned a series of thematic papers. These papers reviewed areas such as monetary and fi scal policy, climate change, inequal- ity, growth, and urbanization—the subject of this volume. In addition, 25 case studies were commissioned to explore the dynamics of growth in spe- cifi c countries. Each presentation benefi ted from comments by members of the Commission and other workshop participants from the worlds of policy, theory, and practice. The workshops turned out to be intense and lively affairs, lasting up to three days. It became clear that experts do not always agree, even on issues that are central to growth. The Commission had no wish to disguise or gloss over these uncertainties and differences. It did not want to present a Preface ix false confi dence in its conclusions, beyond that justifi ed by the evidence. Researchers do not always know the correct “model” that would explain the world they observe; and even if they know the factors that matter, they cannot always measure them convincingly. While researchers will continue to improve our knowledge of the world, policy makers cannot wait for scholars to satisfy all of their doubts or resolve their differences. Decisions must be made with only partial knowl- edge of the world. One consequence is that most policy decisions, however well-informed, take on the character of experiments, which yield useful information about the way the world works, even if they do not always turn out the way policy makers hoped.