Cities and growth, Gilles Duranton

Cities and growth

Gilles DurantonWharton

oecd, 26 September 2014

City population growth Urbanisation

Technological change

Growth in output per capita

Three sets of issues

• The effect of economic growth and technological change

on cities

• The interaction between urbanisation and development

• The effects of cities on economic growth and

technological change

What drives the population growth of cities?

It is a hard question but much easier than the identification

of drivers of country growth

• Many more cities than countries

• Far fewer determinants

• Lots more data

• Population is easier to count than gdp

• Data heterogeneity is less

• A common history makes identification easier

As a result, some progress

The main drivers of population growth for US

cities

• Amenities

• Roads

• Human capital and entrepreneurship

Some caveats

• We know a lot more about us cities but most results have

been replicated elsewhere in fully urbanised countries

• Despite some well identified channels, we can explain

maybe half the story

• There are some areas of complete ignorance. For instance:

– Urban policies

– Urban leadership / governance

Amenities

• Very strong association: 1 s.d. of January temperature

leads to 0.6 s.d. of population growth

• Focusing on exogenous amenities alleviates simultaneity

concerns

• Warm Januaries may still be correlated with other

growth factors

• Main explanation: a wealth/demand effect

Transport

• Another strong association: 1 s.d. of Interstate Highway

km leads to 0.7 s.d. of population growth

• Roads also induce urban decentralisation

• Roads are not randomly given. Identification using

historical instruments, random placements of rural roads,

historical accidents

• Main explanation: roads lower travel costs and make a

city cheaper as predicted by the monocentric model

• Wrinkle: the effects of roads on population growth is

‘small’

• More generally, transport technology greatly shapes cities

Human capital

• The third strong association: 1 s.d. of the initial share of

university graduates leads to 0.25 s.d. of population

growth

• Worry the more skilled may choose to locate in fast

growing cities

• A variety of identification strategies including the

establishment of land grant colleges c. 1860

• Entrepreneurship as a specific form of human capital

• Key underlying mechanism: cities are better places for

exploiting human capital and accumulating it through

learning

Summary

• Amenities, roads, and human capital are the main known

drivers of city population growth

• Results are broadly consistent across rich (‘oecd’)

countries that are fully urbanised

• Less is known about city growth in developing countries

which are still urbanising

• Transportation matters perhaps more whereas the role of

amenities is in doubt

• This is the world inside the technology frontier and inside

the urbanisation frontier that comprises the large

majority of mankind

The classic plot

4

6

8

10

12

0 20 40 60 80 100

log GDP per capita, 2011

rate of urbanization, 2012

Source: World Bank. 189 countries. The horizontal axis urbanization

rate is the percentage share of population living in cities in 2012. The

vertical axis represents the natural log of GDP per capita in current US

dollar for 2011.

• Well known, extremely robust

• Each extra percentage point of urban population is

associated with an extra 5 percent of gdp per capita

• Agglomeration economies can explain at most a small

part of the relationship (a fifth?)

• Models of structural change?

– Simple models of manufacturing pull require

quantitatively implausible parameter values

– Models of rural push are even worse

– Suggestive of strong frictions in the process or that

urbanisation is an outcome of ‘development’

– We need to take this question more seriously. 50

million rural dwellers move to cities every year

The really important but really hard question

Do cities affect growth?

• We can write models where they do

• Identifying out of the cross-section of countries is really

hard

• Route 1: use the cross-section of cities

– But many questions will be hard to analyse

– We cannot look at gdp growth directly but only at

correlates of growth

• Route 2: rely more strongly on models

A well-established fact...

Innovative activity is geographically highly concentrated

• R&D labs are much more concentrated than labour in

the us

• Several large us cities receive a share of patents that is 5

times of more their share of population

• For small metropolitan, the population share is nearly 3

times the patent share

• For non-metro areas, it is more than 10 times.

• Strong tendency for R&D labs and establishments in

R&D intensive activities to locate extremely close to each

other

... and its corollary

Proportionately more innovations in larger and denser cities

• Elasticity of patents to city population / density of about

0.1-0.2

• Compare with elasticity of wages / tfp to population /

density of 0.02-0.05

• Bell-shaped

• Perhaps due to spatial knowledge spillovers (evidence

from citations trails)

• Some indications that diversity matters

Some caveats

• Causality is not as firmly established at it should

• What fraction of innovation do cities account for (relative

to a world without cities?)

Agglomeration and physical capital accumulation

The accumulation of physical capital accounts for some of the

economic growth we experience. What role do cities play?

Assume a neoclassical growth model:

• Goods production in cities uses buildings, machines, and

labour

• It is subject to agglomeration economies (estimated at

7%)

• Buildings/housing are produced using land and capital

• Residents consume housing and other goods

Calibrating this on existing us data, the growth rate is found

to be 10% lower absent agglomeration effects

Agglomeration and human capital accumulation

The accumulation of human capital also accounts for some of

the economic growth we experience, perhaps more. Human

capital also plays an important role in cities.

Assume a model of human capital accumulation:

• In cities, agglomeration economies make human capital

more productive

• In turn, this incentivises human capital accumulation

• As human capital in cities become more productive, this

makes city grow in population (and human capital)

Fitting standard parameter values about the costs and

benefits of cities implies that cities account for more than half

the growth caused by human capital accumulation

Some takeaways

• Technological change and economic growth affects cities

– Supply factors (transport, human capital)

– Demand factors (demand for amenities)

• Urbanisation and development

– The jury is still out

– Suggestions that cities and urbanisation are more

than a problem of “accommodation” in development

• Do cities affect growth?

– Cities are where modern growth is taking place

– Suggestions that they mildly foster the accumulation

of physical capital

– Suggestions that they may have a large effect on

human capital accumulation

• Important urban policy dilemmas

– Tension between urban durability and the flexibility

required for innovation

– Tension between the need to keep cities simple and

manageable and accommodating the diversity that

underpins urban dynamism

– Tension between local policies that want to anchor

specific economic activities and national efficiency

that requires the most productive activities to expand

wherever they might be