"Urbanization and Public Investment: Implications for Growth and Poverty Reduction in Africa" presented by Paul A. Dorosh, Director of Development Strategy and Governance, International Food Policy Research Institute, at Analytical Exchange on “Strategic Consequences of Urbanization in Sub-Saharan Africa to 2025”, Arlington, Virginia, April 3, 2014

1. Urbanization and Public Investment:
Implications for Growth and Poverty Reduction in
Africa
Paul A. Dorosh*
Director, Development Strategy and Governance
International Food Policy Research Institute
Analytical Exchange on
“Strategic Consequences of Urbanization in Sub-Saharan Africa to 2025”
Arlington, Virginia
April 3, 2014
The simulation model results presented here derive from Dorosh and Thurlow (2014), “Can Cities or Towns
Drive African Development? Economywide Analysis for Ethiopia and Uganda”. World Development. 1

2. Presentation Outline
1. Urbanization and Connectivity in sub-Saharan Africa
– Primary and secondary cities
– Agglomeration and travel time
2. Implications of Urbanization and the Allocation of
Public Investments: Model Simulations
3. Concluding Observations
2

3. Cities with Population Greater than 100K
Sub-Saharan Africa 2000
* Average annual growth 1960-2000 for cities with data for both years.
Source: Calculated from Henderson and Wang World Cities Database. 3
Population # Cities
Total
Pop
(mns)
Average
Pop
(mns)
Share of
Urban
SSA
Average
Annual
Growth*
> 10 mn 1 13.40 13.40 9.3% 7.4%
5 - 9.99 mn 1 5.06 5.06 3.5% 6.2%
2 - 4.99 mn 11 29.50 2.68 20.5% 4.8%
1 - 1.99 mn 25 34.81 1.39 24.2% 5.1%
0.5 - 0.99 mn 26 17.47 0.67 12.2% 4.3%
0.25 - 0.499 43 15.13 0.35 10.5% 4.1%
0.1 - 0.249 178 28.25 0.16 19.7% 2.9%
Total 285 143.63 0.50 100.0% 4.5%

4. Ethiopia: Population of Cities
with over 100,000 Inhabitants, by City Size
Source: Calculated from Henderson and Wang World Cities Database and Ethiopia Population Census.
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1970 1980 1990 2000 2008
2.0mn+
1.0 - 1.99m
500-999K
300-499K
200-299K
100 - 199K
4

5. Ethiopia Cities with Population Greater than
100K (Population and Number of Cities)
Source: Calculated from Henderson and Wang World Cities Database and Ethiopia Population Census.
Population
100 - 199K 200-299K 300-499K 500-999K 1.0 - 1.99m 2.0mn+ Total
1970 - - - 730 - - 730
1980 230 - - - 1,182 - 1,412
1990 611 252 - - 1,793 - 2,656
2000 700 - 310 - - 2,639 3,649
2008 1,188 429 342 - - 2,738 4,697
Number of Cities
100 - 199K 200-299K 300-499K 500-999K 1.0 - 1.99m 2.0mn+ Total
1970 0 0 0 1 0 0 1
1980 2 0 0 0 1 0 3
1990 5 1 0 0 1 0 7
2000 5 0 1 0 0 1 7
2008 9 2 1 0 0 1 13
5

6. Road Infrastructure and Urbanization
Travel Time 1984
6
Source: Schmidt and Kedir (2009).

7. Road Infrastructure and Urbanization
Travel Time 1994
7
Source: Schmidt and Kedir (2009).

8. Road Infrastructure and Urbanization
Travel Time 2007
8
Source: Schmidt and Kedir (2009).

9. Ethiopia: Urbanization
9
Official Agglomeration
Estimate Index
(percent) (percent)
1984 11.4% 3.7%
1994 13.7% 7.1%
2007 15.9% 14.2%
(mns people) (mns people)
1984 4.55 1.48
1994 7.33 3.80
2007 11.72 10.50
(growth rate) (growth rate)
1984-1994 4.9% 9.9%
1994-2007 3.7% 8.1%
1984-2007 4.2% 8.9%
Ethiopia is urbanizing faster than people think!!!

10. Ethiopia: Alternative Urbanization Estimates
10
0
2
4
6
8
10
12
14
1984 1994 2007
(millions)
Agglomeration Index Official CSA

11. Policy Questions
• To what extent will increased migration to urban
centers accelerate economic growth via agglomeration
effects?
(i.e., spillovers from densely concentrated populations)
• Will urbanization lead to higher national poverty?
(i.e., rural “brain-drain”; increased competition in non-farm
product markets; lower agric. production and higher food
prices)
• What are the trade-offs between investing in either
rural areas, small towns, or major cities?
(i.e., in terms of national economic growth or poverty
reduction)
11

12. Drivers of Migration and Productivity Growth
• Rural-urban migration depends in part on
expected relative incomes in rural and urban
areas, and more broadly, on expected welfare
(including social, health and economic
benefits and costs)
• Positive agglomeration effects in cities may
contribute to higher total factor productivity.
• Public investment in infrastructure enhances
productivity of private investment.
12

13. Economic Structure:
Ethiopia and Uganda
• Models built on consistent economy-wide data bases (social
accounting matrices) with substantial disaggregation by
economic sectors and household groups
– 85% of the population resides in rural areas in each country
– 20% of GDP generated in large cities (population > 50,000)
– Poverty rates are significantly higher in rural areas
Population (%) GDP (%) Poverty rate (%)
Ethiopia Uganda Ethiopia Uganda Ethiopia Uganda
National 100.0 100.0 100.0 100.0 40.0 40.0
Rural 84.5 84.7 53.3 62.4 41.8 44.3
Towns 10.2 9.3 26.4 18.0 35.5 23.7
Cities 5.2 6.1 20.4 19.6 19.2 4.8
13

14. Characteristics of cities, towns and rural areas
in Ethiopia and Uganda, 2005
14
Notes: Figures are calculated using sub-national SAMs. Population from household
surveys. Poor population based on national poverty lines set at the 40th population
percentile per capita expenditure level. Workers are separated into occupation
groups.
Source: Dorosh and Thurlow (2014).
Ethiopia Uganda
Rural Towns Cities All Rural Towns Cities All
Population (mil.) 60.3 7.1 3.6 71.0 23.0 2.5 1.7 27.2
Share (%) 84.9 10.0 5.1 100.0 84.7 9.3 6.1 100.0
Poor population (mil.) 25.2 2.5 0.7 28.4 10.2 0.6 0.1 10.9
Share (%) 88.7 8.9 2.5 100.0 93.8 5.5 0.7 100.0
National GDP shares (%) 53.3 26.4 20.4 100.0 62.4 18.0 19.6 100.0
Regional GDP shares (%) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Agriculture 81.4 17.9 0.0 48.1 37.2 5.3 0.1 24.2
Industry 3.2 15.7 27.6 11.5 18.0 30.5 36.2 23.8
Services 15.3 66.4 72.4 40.4 44.8 64.2 63.7 52.0
Workers (mil.) 22.3 2.6 1.3 26.2 9.5 1.1 0.7 11.3
Skilled 0.1 0.4 0.2 0.7 0.3 0.1 0.1 0.5
Semi-skilled 0.9 1.2 0.8 2.9 1.5 0.4 0.4 2.4
Unskilled 21.2 1.0 0.4 22.6 7.7 0.5 0.2 8.4

15. Highlights of CGE Model Structure
• Sectoral and rural economy linkages
– National product markets (some non-tradable local
services)
– Open economy model (i.e., imperfect substitution)
– Fixed technical coefficients (i.e., IO table)
• Surplus labor in rural areas
– Higher wages in urban industrial sectors
• Internal migration
– Limited treatment of remittances
• Agglomeration and technical change
15

16. Accelerated Rural-Urban Migration
Simulation Results
Increasing urbanization by 10 percentage points (to
31 percent in Ethiopia; 29 percent in Uganda)
results in…
– Faster annual GDP growth in urban industry (+2.5 to
3.0 percentage points)
– Faster annual GDP growth in agriculture (+0.7 to 1.3
percentage points) due to increased market demand
for agricultural products
– Increase in overall per capita consumption for poor
and non-poor by 0.3 to 0.4 percentage points
– Lower urban average per capita welfare as migrants to
cities increase urban labor supplies
16

17. Public Investment Scenarios
• Raise share of public capital allocated to either
cities, towns or rural areas by 10%
• Reallocation of existing resources
– Increase budget allocation for target sector
– Proportionately reduce allocation to other sectors
• Urban investment increases public capital (KPC) but
reduces investment in agriculture
• Agriculture investment has a TFP-spending elasticity of
0.15 (causes agricultural output to increase/decrease
for agric./urban sims)
Source: Dorosh and Thurlow (2014), “Can Cities or Towns Drive African
Development? Economywide Analysis for Ethiopia and Uganda”. 17

18. Ethiopia: Development Budget
1999/00 and 2007/08
18Source: Ethiopia Ministry of Finance and Economic Development data.
0
5
10
15
20
25
30
35
1999/00 2007/08
(bn2007/08birr)
Rural
Urban
Other

19. Re-allocation of Public Investment
Simulation Results
Increasing the share of public investment going
to urban infrastructure results in…
– Faster overall annual GDP growth (by about 0.2%
points)
– More rapid growth in industry and services
– Slower growth in agriculture
– Higher levels of national welfare (price-adjusted
real consumption)
– Higher levels of national poverty (since most of
the poor reside in rural areas and their incomes
are linked to the agricultural sector)
19

20. Simulation Results:
Household Welfare in Ethiopia and Uganda, 2005
20
Note: Welfare measured by equivalent variation, which is a consumption-based
measure that controls for price changes.
Source: Dorosh and Thurlow (2014).
Baseline
growth
(%)
Deviation from baseline (%-point)
Urban-
ization
Investment scenarios
Cities Towns Rural
Ethiopia
Annual welfare change 1.73 0.41 0.08 0.10 0.10
Poor 1.17 0.25 -0.03 0.04 0.30
Non-poor 1.86 0.44 0.10 0.12 0.05
Rural areas 1.38 0.90 -0.02 0.04 0.30
Towns 0.72 -1.22 0.14 0.19 -0.14
Cities 1.69 -1.95 0.29 0.15 -0.22
Uganda
Annual welfare change 2.45 1.31 0.31 0.20 0.01
Poor 1.50 1.05 0.16 0.08 0.29
Non-poor 2.59 1.35 0.33 0.21 -0.03
Rural areas 1.81 1.68 0.23 0.12 0.19
Towns 2.21 -0.71 0.30 0.34 -0.25
Cities 3.64 -0.25 0.59 0.31 -0.36
Residents of the
areas of increased
investment enjoy the
largest welfare gains.
The biggest poverty
reduction effects
result from rural
investments.

21. Concluding Observations
• Migration/agglomeration are potential sources of
economic growth
• Model simulations indicate that:
– Urbanization reduces the gap between average rural
and urban incomes
– But without supporting investments, there is an
“urbanization of poverty” and rising urban inequality
• There is a growth-equity trade-off to increasing
the share of public investment in urban areas
(i.e., faster growth but lower welfare for the
average poor household)
21

22. Sources
22
Chamberlin, Jordan and Emily Schmidt. “Ethiopian Agriculture: A
Dynamic Geographic Perspective” in Dorosh, Paul and Shahidur Rashid
(eds.), Food and Agriculture in Ethiopia: Progress and Policy Challenges.
Philadelphia, PA: University of Pennsylvania Press.
Dorosh, Paul and James Thurlow. 2014. “Can Cities or Towns Drive
African Development? Economywide Analysis for Ethiopia and
Uganda”. World Development.
http://dx.doi.org/10.1016/j.worlddev.2013.10.014
Dorosh, Paul and James Thurlow. 2012. “Agglomeration, Growth and
Regional Equity: An Analysis of Agriculture- versus Urban-led
Development in Uganda”, Journal of African Economies, 21(1): 94-123.