Urban Development and Economic Growth in Bangladesh

Somik Lall
The World Bank

Workshop on Growth & Employment, December 12, 2005

Outline
Bangladesh is predominantly rural but rapidly urbanizing Across countries, urbanization is typically seen to accompany and lead economic growth (economic and institutional transformation) Performance of individual cities is conditioned on local efforts as well as national / regional circumstances Rapid population growth poses challenges for providing consumer and producer services What strategies are useful for improving the contribution of the urbanization process to economic growth?

Across countries, urbanization accompanies economic transformation

80 70 60
Agriculture %

45
Urban population (% of total)

40 35 30 25
Urban %

50 40

20 30 20 10 0 1965 1970 1975 1980 1985 1990 1995 1999 15 10 5 0

Labor force in agriculture (% of total)

Source: World Development Indicators 2001

Agriculture, value added (% of GDP)

And the Importance of agriculture diminishes as countries get richer

100,000

Per capita GDP, 2000

10,000

Bangladesh

1,000

100 1 10 Agriculture, value added as percent of GDP, 2000 100

Source: World Bank Indicators (2000 data)

Share of urban population is rapidly increasing In Bangladesh

Urban Population (%)

200 180

40 35 30 25 20 15 10 5
1950 1960 1970 1980 1990 2000 2005 2015 2030
Population, millions

160 140 120 100 80 60 40 20 0

19 50 19 60 19 70 19 80 19 90 20 00 20 10 20 20 20 30

Total Rural Urban

Source: United Nations World Urbanization Prospects

And much of the rural population is in close proximity to urban centers

100 90 80 70

Cumulative rural population by distance from different size towns

Percent

60 50 40 30 20 10 0 1 3 5 7 9 11 13 km 15 17 19 21 23 25

5,000 10,000 20,000

Distance less than 2 km 5 km 10 km 15 km

Minimum town population 5,000 10,000 20,000 9.4 28.1 82.0 96.4 8.6 24.4 72.4 91.6 7.8 20.4 59.0 81.6

Source: GIS calculations using WARPO/CEGIS data; based on 1991 census figures. Percentages are likely to be higher today as towns have increased in size and as rural areas near larger towns have grown faster than more remote areas.

Urbanization has been characterized by excessive concentration in a few agglomerations

Table 1: Population growth of the largest agglomerations City Population Rank (2000) Population (2000) Population (1990) Population (1980) Population (1970) Annual Growth (19702000) 7.1% 5.5% 5.1% 7.6% 4.2%

Dhaka Chittagong Khulna Rajshahi Mymensingh Comilla

1 2 3 4 5 6

12300 3581 1426 1016 328 307

6619 2265 972 517 189 135

3248 1333 622 238 108 126

1474 693 310 105 N.A. 86

Note 1: Population in thousands; Note 2: Data are for agglomerations;

At the other end of the size distribution: 300 other urban areas account for only 4 percent of the urban population

Urban concentration is consistent with countries at similar income levels

Dhaka accounts for 32% of urban population Concentration is important for efficiency in early stages of development There is an optimal range of concentration which varies with economic development increases, peaks, declines
Urban concentration in comparator counties (%)

South Asia Region

Country India Pakistan Primacy 5.72 21.94

Per capita Incomes

Country Cameroon Mongolia Senegal Primacy 22.48 56.27 43.53 45.50

Land area
Country Bulgaria Guatemala Korea Honduras Primacy 20.84 20.09 23.28 27.25

Historic Incomes
Country Colombia (75) Honduras (85) Armenia (95) Turkey (75) Primacy 20.16 35.48 50.85 21.63

Kyrgyz Republic Data Source: WDI Tables, SIMA

Economic activity is also concentrated around major agglomerations

Core-periphery pattern, with Dhaka as the primary center and the port cities (Khulna and Chittagong) as secondary centers

Factors promoting urban concentration

National political institutions :
Allocation of local public expenditures in centralized settings: national government may favor one or two cities where decision-makers live. Favoritism involving the national government not choosing to invest sufficiently in interregional transport and telecommunications, so hinterland cities are less competitive locations; and

Central government is directly responsible for urban and regional development Failures of national land development markets
With limited local fiscal autonomy, land developers and local governments cannot develop alternate locations and spread development across the urban hierarchy.

Implications of urban concentration (positives)

Benefits from economies of scale and agglomeration Economic transformation with large cities leading manufacturing / industrial representation
Dhaka and Chittagong have over seven times the national representation of employment in garments and machinery. Co-location of business and financial services boost firm level performance

Thick labor markets Higher quality of life for residents as these cities can do better in proving local public goods and services

Implications of excessive urban concentration (costs)

High prices for immobile factors (land and housing) High commuting costs (leading to a segmented labor market), along with congestion and pollution diseconomies Management failures lead to bottlenecks in infrastructure and service provision, thereby increasing production costs This translates into lower welfare and overall economic performance

Dhaka was ranked as one of the most polluted cities in the World , but PM2.5 concentrations have declined by 41% because of Two Stroke Phaseout

350

PM2.5

Average

Microgram/m3

300 250 200 150 100 50

Low satisfaction with public services

Table 1: Satisfaction with Services (% of surveyed households) Services Police Land Registration Transport Electricity Services Judiciary Health Care Garbage Disposal Sewerage/ Sanitation Education Drinking Water 21 27 5 9 28 11 12 8 Dhaka 2 2 7 8 8 11 15 17 Chittagong 0 1 3 2 1 4 10 16 Khulna 1 10 19 12 2 18 12 11 Rajshahi 2 4 6 2 5 9 10 16

Source: Proshikha (2002)

Does the distorted urban system translate into lost opportunities for economic growth?
The central link between concentration and economic performance revolves around economies of scale. If cities are too small, resources could be spread too thinly/evenly across cities and scale economies are not efficiently exploited. However, if resources are over-concentrated in one or two excessively large cities, this raises costs of production of goods and lowers the quality of urban service provision.

Table 1: The Effect on Annual Economic Growth Rates of Urban Concentration

The optimal degree of urban primacy

Loss in growth rate from excessive primacy (one standard deviation)

Growth effect of a one standard deviation increase in road density in a country with excessive primacy

Low income ($1100) Medium income ($4900) High income ($13400)

.15 .25 .23

.71 1.6 1.6

.23 .68 .68

The table looks at a medium size country --national urban population of 22 million. Numbers for countries with urban populations of up to 50-60 million are similar. The first column calculates the degree of urban primacy that maximizes growth rates and steady state income levels. Error bands about this for medium or higher income countries are quite tight (standard error of .018). The growth losses of excessive primacy are high, although more so, as income rises. The role of transport investment (length of the national road system divided by national land area) is quite significant, particularly as countries enter middle income phases when deconcentration becomes critical.

Growth implications for Bangladesh

In 2000, Urban population of 35 million; income per capita (1987 PP) of around $2100. At this income level and urban scale, Bangladesh should have an optimal primacy value of around 21 percent. In practice, primacy is 32 percent -- 11 percent points higher than optimal values. Based on Hendersons estimates, primacy in Bangladesh is more than 2 standard deviations higher that the optimal range. At this income range and urban scale, one standard deviation increase from optimal values reduces growth by 1 percent. A lower bound estimate of moving from two standard deviations above optimal value to the optimal value would increase GDP per capita growth rates by at least 2 percent points.

How do we improve the contribution of the urbanization process to economic growth?

Improving management of the largest agglomerations Dhaka (and other major cities) will continue to attract rapid population growth unless other urban centers become viable investment decisions. Performance of major agglomerations need to be enhanced
Institutional reform Provision of serviced land Enhancement of own source revenues

Investments in inter regional infrastructure to deconcentrate standardized manufacturing

How do we improve the contribution of the urbanization process to economic growth?

Developing alternate locations Enhance the ability of Pourashavas to provide local services that are valued by local resident (but how?)

BMDF may be a useful vehicle for local infrastructure improvements There may however be adverse welfare consequences if resources are spread too thinly or large cities are starved in order to stimulate smaller centers