Journal Issue

Urbanization Problems and Prospects

International Monetary Fund. External Relations Dept.
Published Date:
December 1970
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Richard M. Westebbe

THROUGHOUT the less developed world rapid urbanization is accompanied by bitter social distress as well as intractable problems that will profoundly influence economic development. The urban population grows far more rapidly than the number of new jobs available to it, causing severe unemployment and underemployment. The cities are financially unable to meet the sharply rising demand for social services and social overhead investment, thus leading to a deterioration in the quality of urban life for the bulk of the inhabitants and to slums and shanty towns for the very poor. The chaotic growth of cities, the ineffective allocation of resources, and deficiencies in basic infrastructure are retarding industrialization, the growth of employment, and, in turn, the growth of the national economy.

Not only do the cities fail to provide jobs for the newcomers—they do not even provide the training and the cultural integration that might lead to jobs. Often, the newcomers are absorbed only in the strictest physical sense; in every other way they remain outsiders. The result is that the cities of the underdeveloped world are increasingly spawning what has been termed by Oscar Lewis a “culture of poverty” that is more akin to rural peasant society than it is to modern urban society.

Is there, then, an “urban crisis”? It is tempting to think in such terms. The word “crisis” suggests that urgent measures can be taken that will avert imminent disaster. In fact there are no urgent measures that we can take, and there is no prospect that the social structures of the less developed world are about to collapse. We are witnessing an historical transformation, in which great forces are at work, rending and remaking the whole social pattern; these forces are operating over a long period, and the concept of crisis is inappropriate.

It is an unbalanced transformation and—given present demographic trends, economic growth rates in the less developed world, and the constraints on resources—it will probably get worse. Yet urbanization is, for better or worse, at the core of the process of development. The economic growth of urban areas where most industry is centered and the growth of the national economy are closely interrelated. The task then is to plan for the most efficient spatial and economic organization of the system of cities in the less developed world in order to maximize growth. Further, we should seek to minimize the cost of urbanization, improve the mobilization of urban resources, and greatly improve the management of urban centers. In this way more resources will be available to raise output, increase employment, and facilitate the economic and cultural integration of the growing marginal city populations of the less developed regions into modern urban life.

In such ways governments and institutions concerned with international development can help to shape these forces, we must first of all study them. As reverse, the historical forces that are currently manifesting themselves in the process of urbanization. To shape these forces, we must first of all study them. As the world will not wait and much of our knowledge will have to be obtained from experience, programs and policies need to be devised on a current basis. The management of both national and international resources will have to be devoted to urban areas that can be greatly improved so that the pattern and scale of urban development can increasingly reflect national, economic, and social objectives.

The Demographic Characteristics of Urbanization

The urbanization process in the developing countries is characterized by high rates of natural population increase coupled with an accelerating movement of rural populations to urban centers.1 In the 40 years from 1920, the urban population of the more developed countries doubled, so that by 1960 it was 46 per cent of the total; North America was 58 per cent urbanized, the Soviet Union 36 per cent. In the same period, the urban population of the less developed countries grew almost fivefold but still constituted only 15 per cent of the total by 1960; in most of Asia the percentage urbanized was about 14, in tropical South America it was 30, and in tropical Africa 7.2

In the most recent years the trends have accelerated. In the decade of the 1950’s the rate of increase of urban population was almost one and a half times that of the previous three decades in both the developed and the less developed countries; in the less developed countries urban populations rose by 64 per cent from 1950 to 1960 compared with 31 per cent in the developed countries. Projections for the period through 2000 indicate that in those less developed countries that are densely populated the urban population may rise fourfold to fivefold and in those of relatively low density the urban population may rise sixfold to eight-fold.

Despite these dramatic increases in urban populations, the rural and small-town populations of the less developed countries rose by over 50 per cent from 1920 through 1960 and are projected to rise by a further 90 per cent through the end of the century. The growth of big cities is expected to continue to exceed urbanization rates in general. With most major cities growing at rates of from 5 per cent to 8 per cent annually, they can be expected to double their populations in 10 to 15 years’ time.

While the projections take no account of the effects of potentially successful family planning programs, it would be unwise to look to such programs for much relief in the next two decades. In the first place, family planning programs are only likely to become effective gradually and are therefore unlikely to have great impact on population growth rates in the near future. Second, the numbers entering the labor force will not be affected for at least 15 years; these people are already born. Third, family planning no matter how effective, is unlikely to affect the rate of rural to urban migration. More than half of the urban population growth is due to migration from rural areas and small towns. The evidence indicates that as countries reach higher levels of urbanization, the exodus from rural areas increases sharply. The really low income areas of the world, including most of Asia and tropical Africa, have yet to reach 25 per cent levels of urbanization.

Urbanization and Development: Past and Present

In the countries that are now highly urbanized—the leading industrial countries—urbanization proceeded slowly at the beginning of the development process, then rose steeply in the early stages of industrialization, and finally tapered off when a saturation point was reached. At the most advanced stage of urbanization dispersion of the urban population takes place through the industrialization of rural areas. Technological changes in transport and communications as well as the changing functions of cities over time contribute to this process.

India may be taken as a case in point in comparing development with urbanization in the less developed countries. India’s urbanization in 1951 was 11 per cent, a point reached by a number of European countries between 1850 and 1900. At this point—the 11 per cent point—slightly more than half of the population of the European countries derived their livelihood from agriculture, while two thirds of India’s population still depended on agriculture. About one fourth of Europe’s labor force was already engaged in manufacturing at this early state of urbanization; the figure for India was 10 per cent. In addition, much of India’s manufacturing is of the cottage kind in rural areas. By contrast, industry in developing Europe was able to benefit from the external economies of location in large urban centers and internal economies of scale, leading to rapid capital formation in urban areas. In India the generally smaller scale and dispersion of manufacturing reduces capital formation, technological change, and the growth of employment in rapidly growing centers. The increasing urban population accordingly must find employment in miscellaneous low productivity service occupations. In contrast, the United States and Europe industrialized under conditions where the long-run demand for labor approximated the supply of labor in urban areas and endowments of capital and capacity for introducing technological changes were comparatively far greater.

Rural-Urban Migration

If the cities provide neither sufficient jobs nor decent housing, why are the less developed countries urbanizing so rapidly? The answer may be sought in terms of economic motivation as well as the social opportunities of major urban areas. In India, the city offers at least an alternative to the overpopulation of rural areas where there is not enough arable land to support a growing population. Although the land problem is less severe in Latin America, there is nevertheless substantial evidence of rural push. Latin American cities with higher degrees of industrialization and a more rapidly growing modern sector also offer better prospects for some sort of employment. For the rural migrant the city also provides vastly improved educational opportunities for his children, health services for the entire family, and a range of urban amenities and services; while of low and declining quality, they are nevertheless superior to what was available in the rural areas. The decision to come to the city with its higher per capita incomes and other advantages is thus rational, and the shanty towns that often shock visitors from the rich countries of the world are often slums of hope rather than slums of despair. Over the short run the supply of labor in the cities of the less developed world is almost infinitely elastic, and an increased demand for labor in the urban modern sector will continue to attract an increased flow of rural migrants into the city.

The effects of rising rural productivity have not been sufficiently analyzed. With improved inputs and techniques in rural areas, dramatic rises in output per unit of land are being achieved. In the industrializing western world this phenomenon freed large numbers of people to go to the cities. In the underdeveloped areas it may simply make more people superfluous on the land. Yet we would want to know more about the impact of rising income levels on the demand for goods and services in rural areas and the possibility of absorbing part of the surplus labor force in urban settlements in rural areas.

The Provision of Public Services

The conceptual problems of analyzing urban investment in terms of costs and benefits are complex. The fact that an increasing proportion of the population of the less developed countries will be living in urban areas means that the demand for urban public services will be increasing. People living in rural areas normally do not enjoy the same benefits of public health, education, fire, police, sewerage, water, roads, power, and other services that are available in urban areas. At any rate, their requirements for such services are lower. Even housing creates special demands in urban areas that are simply not considered as a function of public policy in rural areas. Public authorities face two difficulties in relation to this rising demand. First, if they decide to allow the quality of services to decline, social pressures are likely to increase. Second, they will be constrained by the impact of declines in service levels on the productivity of the urban economy.

The Economics of Urban Growth

Most cities are the result of a complex dynamic process involving not only economic factors but also social and psychological considerations. A good deal of what we know from the literature concerns urban growth in highly industrialized western societies. The reasons for the original establishment of urban centers include natural location, resource advantages, and historical considerations such as the growth of ports related to raw material exports or the location of an administrative center. The economic factors leading to the creation and growth of urban centers are basically that the economies of agglomeration increase as cities grow, while the unit costs of infrastructure fall substantially, at least through the first stages of city growth. Some of the agglomerative factors that account for urban concentrations and determine their contribution to national growth are accessibility to markets, internal economies of scale, scale economies in the public sector, external economies to industry that include inter-industry linkages and encompass finance, law engineering, marketing, and such overheads as good schools, universities, and research centers, availability of skilled labor, and communications.

The economic base of a city is conventionally regarded as those industries that are able to export to other regions or abroad. They create a multiple employment and income effect on total economic activity in the area in question. In the long run, however, a city must be able to attract new industries as well as sustain existing ones. It must have trained manpower and training facilities and research and other institutions important for innovation. The real economic base is the city itself. Historically, it can be observed that the growth of a city is an interacting process between production for export and import substitution in which changing technology and markets cause constant adaptations to the point where the original factor causing the creation of the city becomes a minor element in its continuing growth. The capacity of a city to attract industries and growth is in part a function of how efficiently it is organized and administered and in part a function of the adequacy and cost of its basic productive infrastructure.

The presence of the city is also a powerful influence for the modernization of agriculture in the surrounding region, as it provides markets for high value crops as well as the technology, inputs, and distribution mechanism needed to transform traditional agriculture to a modern basis.

The city is not, then, an isolated economic unit; it is a subsystem of a national economy. A nation may be said to consist of a system of cities in which each performs functions for the surrounding regions. In addition, cities may be regarded in a hierarchical framework, with certain primary cities performing functions for the entire economy and other urban centers dependent on the primary city in varying degrees. In some countries the primary city continues to grow seemingly at the expense of other lesser urban centers because of its ability to attract capital, industry, and labor, causing severe imbalances in regional standards of living and growth. As the demand for urban services and overheads is greatest in the primary city, it receives the bulk of public investment for this purpose, thus contributing to its further growth.

Much of what is happening in the urbanization process is the result of a large number of private decisions that react to limited alternatives and that may well not benefit the economy as a whole. Adequate infrastructure for industries often exists only in certain central cities; migrants logically come where the opportunities seem greatest, and the government and foreign aid agencies react by financing investment to make good deficiencies in urban services in the places that are growing. There is disquieting evidence that the growth of western cities under market influences has not been satisfactory from the point of view of either welfare of the inhabitants or efficiency of the economic systems, particularly if the economic costs of environmental pollution and social costs are considered. The high cost of infrastructural investments in cities in the less developed countries may mean that the historically given spatial locations of urban services are not necessarily economical, given the present structures of their economies. The decision-making apparatus is usually fragmented. Not only are the many small municipal administrations and independent authorities unable to allocate resources in terms of an urban metropolitan economy but often they do not regard economic growth as important in their decisions to allocate urban services. At the national level, too little consideration is given to regional locational factors in allocating resources and setting policies, although there is some evidence of progress in this respect in several countries. This would be a promising development, for central government interest in urbanization is very important.

A National Approach to Urbanization

There are essentially two approaches to the present chaotic growth observed in major metropolitan areas. First is the identification of alternative “growth poles” on the basis of their economic potential, which can attract a share of the internal migration through deliberate policies and programs to stimulate their growth. Growth poles also help a country on its way to national goals in that they promote the growth of regional per capita income. Industries that are resource oriented or that have heavy inputs of raw materials prefer urban centers near such resources arid raw materials. The increasing tendency of less developed countries to move from import substitution in the consumer goods field to import substitution in intermediate products and capital goods may contribute to decentralization of city locations. In carrying out a national strategy, consideration should be given to selecting regions where concentrated activity and investments can have a decisive impact on the economic development of a wide area.

A second approach, which is by no means inconsistent with decentralization through alternative growth poles, is the improved allocation of resources in existing cities. The objective would be to determine the most efficient direction of urban growth and to use public policy instruments to achieve an optimum use of available space. Land use should be organized in such a way that the location of productive activities and dwellings makes the most efficient use of combinations of transportation and other infrastructural investments. Accomplishment of this more efficient pattern of urban growth would include the creation of industrial estates, the acquisition of parcels of land large enough to ensure the availability and financing of land for housing of various income groups, and the planning and carrying out of package programs of public infrastructural investments. By anticipating and planning for growth, the public authorities could avoid the distortion of land use that will occur through speculative rises in land values and would in fact be able to acquire as a public resource a good part of the gain in land values resulting from the investment decisions of the public sector.

The Housing Issue

The issue of housing is a central one in the problem of urbanization. Enormous public resources have been spent, mainly in Latin America, on low-cost public housing and middle-class private housing. The economic arguments for these large-scale grant and investment guarantee programs are based on the presumed increases in productivity of those who have adequate housing versus those who do not. Further, a housing industry on the U.S. model can be shown to have important employment-creating effects for the lowest unskilled income groups. At the same time it creates a demand for building materials, thereby causing a building materials industry to grow. In effect, by employing largely surplus labor and using local materials, a new economic sector can be created. There is validity in these arguments, but in practice the programs undertaken so far have not been uniformly satisfactory.

There are various calculations of the so-called need for housing. A recent UN document estimated that three times the present annual expenditure on housing in developing countries would have to be undertaken in order to reach the desired level of construction of 10 units per 1000 persons annually. Neither internal conventional savings nor foreign aid can provide resources for the low income housing need that constitutes the bulk of the deficiency. Few governments could long afford to subsidize the capital and current costs of mass low cost public housing without disabling sacrifices of other economic development objectives.

In many countries with large public housing programs, excess demand pressures have led to high rates of inflation, balance of payments pressures, and misallocations of resources. To the extent that housing demand is based on public credit creation and not on newly generated savings, these circumstances can only contribute to inflationary pressures.

Even if it could be achieved, would such a program be effective? While the provision of a minimum standard house may contribute markedly to the productivity of a worker in a developed, fully employed economy, it is questionable whether productivity would be much affected among slum dwellers whose main concern is to find some kind of employment. Further, the provision of housing alone, for people who cannot get the income to maintain it, usually results in the creation of new slums as migration continues.

Sociological investigation provides part of the answer. For very poor slum dwellers or squatters the primary objective is the right or title to land. When they are given land or seize it, the low income groups build their own houses from intermittent savings. In Latin America there are excellent examples of what can be done in this respect, usually in opposition to law and the police power of the state. Self-built housing does not saddle the owner with large fixed debts. His family gets more housing at an earlier stage than with comparable public housing. Such housing can be built on a large scale consistent with the efficient growth of an urban area by relatively inexpensive public “sites and services” schemes. Unattractive as it is to orthodox planners, planned self-built housing has great potential.

At higher levels of income, experience shows that savings can be stimulated through a variety of public and private institutions that offer the incentive of home ownership and security against inflation. Instead of placing principal reliance upon public funds and government departments to produce housing, public authorities can be most efficient by supporting the creation of appropriate institutional mechanisms and by subsidizing, where necessary, what must basically be financed by the mobilization of private savings.

Some Policy Conclusions

As a consequence of the rapid urbanization of their societies, the developing nations of the world are facing an immense opportunity as well as challenge. The opportunity lies in the possibility of providing for urban growth in a far more efficient manner than was done in the past—precisely because so much of it is yet to come. The cities of the less developed countries in most instances will double in population and perhaps in area in the foreseeable future. The challenge lies in the planning and implementing of integrated national and urban growth strategies that reflect the key role of urban centers in bringing about the economic and social transformation of the nation. Such strategies should recognize the relationship of rural development to urbanization particularly through migration. Strategy should not seek to inhibit arbitrarily the growth of cities or even certain cities, but rather should employ policy and resources to promote a pattern of urbanization that is consistent with basic employment, income, and social goals.

The recognition of the economic development role of the cities by national authorities should lead to a shift in the present preoccupation with sectoral planning in a national framework to sectoral planning within the urban region, where the interdependency of investments and activities in a defined area becomes an important element in achieving national objectives. In order to generate growth in this context, substantial public investments in urban overhead will be required—far higher in absolute amounts and as a proportion of total investment than has been true of the past. This raises the issue of resource allocation at both the national and subnational levels. Choices will have to be made in accordance with a system of priorities. In this, urban service levels should not be fixed at arbitrary levels without good reason, particularly if the alternative to such standards may be jobs, education, or other more basic goals.

The creation of coherent national strategies for urban-regional development will require careful reappraisal of the economy and organization of the metropolitan region. In many cities of the world there are problems of fragmented administration, ineffective municipal or regional utility service systems, and a general lack of coordination in planning and in the allocation of investments. Municipalities are often underfinanced, do not adequately mobilize local resources, and have little conception of budgeting or of what constitutes an effective allocation of resources. What is needed is a development framework within which investment programs can be evaluated and carried out as part of a continuous planning process. The metropolitan development strategy should be aimed at optimizing output and employment in a given area and providing for a least cost overhead and service systems investment consistent with the society’s distributional objectives. In order to carry out such a strategy, effective management mechanisms will be required in the world’s major urban regions. The appropriate institutional mechanisms will vary considerably by country, but at the least they should provide for a coordination between sectors and authorities in the use of resources and for an efficient way of mobilizing revenues. As the large cities provide the bulk of modern sector jobs and incomes and a good part of a nation’s traditional service employment, effectiveness of urban governments may be a critical determinant in the ability of a society to achieve its development as well as distributional goals.

“Urban” is defined by the United Nations as a settlement of 20,000 or over.

In this analysis, temperate South America, including Argentina, Chile, and Uruguay, is included among the more developed countries with an aggregate 1960 urbanization level of 53 per cent. While the demographic pressures in this area are less acute, the problems of urbanization and economic development are serious.

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