One of the first chapters in ancient history that are taught to everyone begins with the discussion of ancient civilizations. But what made us call these societies — be it Harappan or Mesopotamian — as civilizations and distinguish them from the earlier agricultural societies? It was the presence of large urban populations and consequently the breakthroughs that these societies achieved, ranging from handicraft, sewage to metallurgy. The point is that large aggregation of people in one place — urbanization — is essential for innovation, which in turn drives the development and progress of any society.
If we look at the data, urbanization and growth have a high correlation. Now, it is difficult to tell which factor feeds into the growth of the other but it can be safely stated that when people come together, they bring their ideas together and hence increase the probability of new innovation. It is very much like popping popcorn — we do not know which popcorn will pop out first from the pan, but if there are fewer kernels, we know for sure that there is a very small chance for any of them to pop. A cursory look at the urbanization map below is enough to explain that the most developed countries in the world today are also the ones that are highly urbanized.
Now let’s look at the performance of India, China and USA for the past 50 years and this trend comes out in a much stronger fashion. Till the 1980s, India was ahead of China both in terms of per capita GDP as well as urbanization. But post Xiaoping’s reforms, China grew rapidly on both indicators, which is reflected from the almost vertical graphs of both Chinese GDP and urban population.
But why do people migrate from villages to cities? It is because of the better opportunities that cities provide for individual development and the very few other occupational choices available in villages. This is also reflected from the fact that poverty incidence rates are generally less in urban areas compared to rural areas (Source: UNDESA). So cities are better equipped to provide livelihood opportunities — in general, people will tend to migrate to cities as long as cities provide better lifestyle and employment opportunities.
| Country | GDP per capita (constant 2000 US$) | Agriculture (% of GDP) | Industry (% of GDP) | Services (% of GDP) |
|---|---|---|---|---|
| Japan | 39,972 | 1% | 27% | 71% |
| USA | 37,330 | 1% | 20% | 79% |
| UK | 28,244 | 1% | 22% | 78% |
| Brazil | 4,717 | 5% | 28% | 67% |
| China | 2,426 | 10% | 47% | 43% |
| India | 795 | 18% | 27% | 55% |
If we look at the table comparing sectoral GDP composition of different economies, we find that agriculture has an almost insignificant share in the economies of rich countries like the USA, UK and Japan. Since the other two sectors — services and industries — usually flourish only in cities and have higher productivity growth than agriculture, this explains the close association between growth and urbanization. So, is there some way to accelerate urbanization? Yes — if we can design policies that incentivise more people to migrate towards cities.
Having looked at the role played by cities in wealth generation, now arises the question of comparing it against the policy paradigm that is currently famous in India. Consider one of the statements made by Chief Minister of Bihar Nitish Kumar: “Big farmers and entrepreneurs in Punjab are complaining of labour shortage because of a decrease in the arrival of labourers from Bihar who are getting employment in their native villages itself.” Nitish Kumar is one of the more progress-minded politicians in India — and when he makes this statement, it reflects that he thinks it is a positive contribution when the fact is quite the opposite. Nitish was just an example to show that many of our politicians and intellectuals favour policies that provide incentive for poor people to stay in the villages — even though most of these people themselves live in cities.
These policies suppress the natural tendency of people to migrate to cities and also introduce labour market imperfections. Apart from the efficiency argument where labour is not allocated in the most efficient sector, the biggest problem with such policies is that they are not sustainable in the long run. Growth is driven by industry and services and not by agriculture. With the spread of knowledge about medical and modern amenities, villagers expect similar facilities as city people — but it is not possible for any rural society to self-sustain these facilities. It would always require a transfer of wealth from urban to rural centres, and it is difficult to justify any such permanent transfer over a long period of time.
The average land holding size is extremely small — equal to 1.33 hectares in India — and this is one of the biggest hurdles for agricultural modernisation. It not only impedes agricultural growth but is also insufficient for meeting basic human requirements. No surprise that India has such a large number of poor in the villages. Even if we achieve maximum possible agricultural efficiency, it would still be a small relief in the face of a growing population.
Such policies also invert the social security pyramid — more beneficiaries than contributors. Given the reasons above, a rural society would always be dependent on the transfer of wealth from the cities. Since output fluctuations are an integral part of market economies, a large beneficiary population puts high pressure on economic resources in normal times and reduces the elbowroom that could otherwise be leveraged during recessions.
Now that we know policies that portray a rosy village are unsustainable, we should look at other fruits of growth that are actually denied to rural people through such policies. Education and medical facilities require huge investment in infrastructure and personnel. Urban areas — due to their high population densities — can provide access to large populations over these public goods. It is not possible to sustain big hospitals with state-of-the-art technology if there are too few people to access the benefits. This is the reason that for basic treatments, people have to travel long distances and many times the geographical barriers and time delays cost lives. Cities are also such huge aggregations where everyone cares about their own work and not caste — which will provide a final blow to this problem that no amount of affirmative action can help if people continue to reside in the same segregated areas of villages as their forefathers.
If we leave the people to make their own decisions, India would transition to an urban economy sooner or later. But there is a scope for government intervention — not through policies that delay this migration, but by playing a constructive role in the development of cities, helping remove the coordination problems that arise due to large numbers of players involved in building new cities. It is this coordination failure that usually leads to the sewer department digging the road immediately after the PWD finishes building a new one. At the same time, government can help optimise investment across cities and closely monitor real estate bubbles.
To realise the dream of a modern India we need to first clear our minds and accept the reality that a strong and developed India requires urbanization. Any policy which thwarts this progress needs to be reassessed from a long-term perspective. This will require serious effort to change our beliefs — we need to revisit the story of “Do Bigha Zameen” where the protagonist was almost able to earn enough in three months in Calcutta to prevent the auction of his village land. So next time you watch it, you should not feel sad about the tragic end but think about the earning opportunity that Calcutta provided to Shambhu.