RURAL EFFECTS OF URBAN GROWTH IN INDIA

Transcription

1 RURAL EFFECTS OF URBAN GROWTH IN INDIA SAM ASHER, KARAN NAGPAL, AND PAUL NOVOSAD Preliminary: please do not cite or circulate without permission. This draft is not complete and will be updated soon. Please contact the corresponding author for more details. ABSTRACT. Cities have been a major driver of recent employment growth in developing countries. Using newly matched and geocoded data from India s Economic and Population Census, we study how growing cities affect neighboring villages and how these effects vary with distance from the city. Our data also allows us to specifically examine how goods and labor markets influence the transmission of these growth shocks, by exploiting variation in transport infrastructure and rural education. We instrument for city-level growth using trade liberalization shocks and national industry growth in tradable industries. We overcome the challenges posed by the political economy of urban-rural classification by generating equally spaced grid-cells and classifying them as urban or rural based on their population density. Finally, we discuss the implications of these estimates for understanding the effects of recent urban growth in India. UNIVERSITY OF OXFORD UNIVERSITY OF OXFORD DARTMOUTH COLLEGE addresses: karan.nagpal@economics.ox.ac.uk. Date: February 1, We are grateful to Kat Nicholson for excellent research assistance. This project received financial support from IZA. All errors are our own. 1

2 2 SAM ASHER, KARAN NAGPAL, AND PAUL NOVOSAD 1. INTRODUCTION How does rapid urban growth influence rural industrial structure, rural labor markets and rural-to-urban migration? The academic literature on linkages between urban and rural markets has so far focused on structural transformation, particularly on the process by which changes in agricultural productivity in rural areas affect the availability of labor and capital for investment in urban manufacturing (e.g. Lewis 1954, Foster and Rosenzweig 2007, Michaels et al. 2012). As recently as the 1960s, agricultural productivity was strongly tied with urbanization. However, this correlation has steadily declined over recent decades, where rapid urbanization driven by global demand patterns often coexists with stagnant agricultural productivity (Glaeser 2015). The linkages between rapid urbanization and rural development remain poorly understood, which makes it difficult for policy-makers to help rural areas capitalize on the recent success of urban locations. A very basic question is whether rapid urban growth is complementary to growth in the rural non-farm sector, or whether it drives exit from villages, intensifying congestion in cities? There are two major challenges of understanding how and when urban growth influences rural economic outcomes. The first barrier is data; economic data typically arrives at aggregate levels, covering multiple towns and their rural catchment areas. It is thus not possible to relate town-specific shocks to the direct geography of that town. Perhaps the greatest issue is that growing towns often absorb their neighboring rural areas, which are only much later coded as urban in the economic data. Growth in these rural areas is not properly rural growth; it is miscoded urban growth. The substantive research question is how urban growth affects individuals in places that have not been fully absorbed by towns. The second barrier is causal identification; many studies have shown correlation between rural and urban growth, but the direction of causality is difficult to establish and there are many reasons to suspect simultaneity.

3 RURAL EFFECTS OF URBAN GROWTH IN INDIA 3 We have resolved the data problem by assembling a panel of socioeconomic datasets describing the universe of cities and towns in India from 1990 to the present, and linking them to geocoded village census data covering the same period. These are census datasets, covering the universe of firms and individuals, and permit us to match each village to the industry structure and growth patterns of each town. To make causal statements about urban growth, we will take advantage of several exogenous shocks to urban growth that have been identified in the previous literature on India. We will examine two shocks: (i) sector-specific shocks from tariff liberalization during the 1990s that had heterogeneous impacts on towns according to their underlying industrial structure (Topalova 2010, 2011); and (ii) national changes in industryspecific employment and output, which predict heterogeneous growth shocks according to baseline town structure (Bartik 1991, Moretti 2010) Related Literature. This paper contributes to several literatures. Most prominently, it contributes to the long-standing literature that studies urban-rural dynamics. Most papers in this literature, starting with Lewis (1954), have explained these dynamics in terms of changes originating in rural areas, such as changes in agricultural productivity. More recently, Henderson et al (2015) and Jedwab (2013) have tried to explain urbanization in Africa in terms of climate and other changes that have affected rural agriculture. Our paper is different in that it tries to explore causal effects in the opposite direction: how urban change affects rural outcomes. The academic literature on this is relatively thinner. In addition to an older literature measuring correlations between urban and rural growth, several recent papers have made contributions to this question. Kochar (2004) finds that higher wages in urban areas cause an increase in schooling levels in rural areas. In a cross section analysis, Fafchamps and Shilpi (2005) find that rural economic structure is strongly related to urban proximity, but they do not address rapid urbanization, nor are their estimates causal. Cali and Menon (2012) show a high correlation between urbanization and reduced rural poverty across Indian districts; they use instruments that are similar in spirit to what we propose. However, with an average 10

4 4 SAM ASHER, KARAN NAGPAL, AND PAUL NOVOSAD towns per Indian district, they are not able to map the rural geography of urban shocks in detail nor to differentiate between different channels by which urban growth spills over into rural outcomes. Our instruments also give us greater plausibly exogeneity and variation across space. Our paper also contributes to an urban economics literature that uses predictedgrowth instruments to estimate local demand shocks (Blanchard and Katz 1992, Moretti 2010, Diamond 2015), as well as a growing literature in trade and development that exploits exogenous variations in trade tariffs to study the effect of trade liberalization on the local economy. Finally, we contribute to the growing recent literature that uses equally-spaced gridcells to study socio-economic outcomes across space (Gollin, Lagakos and Kirchberger, forthcoming). The rest of the paper is structured as follows. In Section 2, we introduce the main data sources. In Section 3, we explain our identification strategy and the construction of the predicted growth instruments. Section 4 presents the key results, which are discussed in Section 5, and Section 6 concludes. 2. DATA We bring together three main sources of data in this paper: the Population Census, the Economic Census, and geographic coordinates for the locations covered by the two censuses. The Population Census records the total population and its composition for all settlements in the country, urban and rural. We have this data for 1991, 2001 and The Economic Census enumerates all non-farm establishments in the country, with basic information such as number of employees and industrial classification. Its strength lies in its comprehensiveness, and rich detail on the firms industrial classification. In this paper, we use Economic Census data from 1998 and 2005.

5 RURAL EFFECTS OF URBAN GROWTH IN INDIA Why grid-cells? While designating a place as urban or rural, the Population Census follows the administrative classification set by the state government. However, the state governments decisions in this regard are fairly discretionary (Sivaramakrishnan and Joshi, 2015), which has led the Population Census to develop a third category called Census Towns - places that are officially rural but have urban characteristics. Specifically, the Population Census has established three objective criteria for declaring a place as a Census Town: population density exceeding 400 persons per square kilometer, population exceeding 5000, and more than 75% of the adult population employed in non-agricultural activities. This can have a bearing on our results. A significant proportion of the total employment created during the period was in settlements officially classified as villages. For example, in places officially classified as towns, total non-farm employment increased by 13% between 1998 and 2005, but in places officially classified as villages, non-farm employment increased by 30%. When we analyse this non-farm employment created in villages as a function of their distance from the nearest large town or city, we find that much of the increase has taken place in villages close to towns, which may essentially be suburban or peri-urban areas that are de facto part of the nearest town. This is consistent with other findings that a substantial portion of population growth during took place in Census Towns, places that have urban characteristics but are officially classified as villages (Kundu 2011, Denis, Mukhopadhyay and Zerah 2012, Pradhan 2013). To prevent distortion from such political economy issues, we develop a method that is independent of the administrative classification. We obtain the geographic coordinates (latitude and longitude measured in degrees) of locations covered in the Population and Economic Census. We use the geo-coordinates to create equally spaced grid-cells across India. All population and economic census outcomes are aggregated to grid-cells.

6 6 SAM ASHER, KARAN NAGPAL, AND PAUL NOVOSAD 3. IDENTIFICATION STRATEGY To be updated 4. RESULTS To be updated 5. DISCUSSION To be updated 6. CONCLUSION To be updated

7 RURAL EFFECTS OF URBAN GROWTH IN INDIA 7 REFERENCES Bartik, Timothy J Who Benefits from State and Local Economic Development Policies? Books from Upjohn Press, W.E. Upjohn Institute for Employment Research. Blanchard, Olivier Jean, and Lawrence F. Katz Regional Evolutions.? Brookings Papers on Economic Activity, 23(1): Cali, Massimiliano and Carlo Menon Does urbanisation affect rural poverty? Evidence from Indian districts. SERC Discussion Papers, SERCDP0014. London School of Economics and Political Science. Denis, Eric, Partha Mukhopadhyay and Marie-Helene Zerah Subaltern Urbanization in India. Economic & Political Weekly, 47(30): Diamond, Rebecca The Determinants and Welfare Implications of US Workers Diverging Location Choices by Skill: Working Paper. Eichengreen, Barry and Poonam Gupta The Service Sector as India s Road to Economic Growth. NBER Working Paper Eichengreen, Barry and Poonam Gupta The Two Waves of Service Sector Growth. Oxford Economic Papers. Ellison, Glenn and Edward. L. Glaeser The Geographic Concentration of Industry: Does Natural Advantage Explain Agglomeration? American Economic Review Papers and Proceedings, 89(2): Ellison, Glenn, Edward. L. Glaeser and William Kerr What causes industry agglomeration? Evidence from coagglomeration patterns. NBER Working Paper Fafchamps, Marcel and F. Shilpi Cities and Specialisation: Evidence from South Asia. The Economic Journal, 115(503): Fafchamps, Marcel and J. Wahba Child labor, urban proximity, and household composition. Journal of Development Economics, 79(2):

8 8 SAM ASHER, KARAN NAGPAL, AND PAUL NOVOSAD Ghani, Ejaz, William Kerr and Alex Segura Informal Tradables and the Employment Growth of Indian Manufacturing. World Bank Policy Research Working Paper Goldberg, Pinelopi K, Amit K Khandelwal, Nina Pavcnik, and Petia Topalova Multiproduct Firms and Product Turnover in the Developing World: Evidence from India. The Review of Economics and Statistics, 92(4): Goldberg, Pinelopi K, Amit K Khandelwal, Nina Pavcnik, and Petia Topalova Imported Intermediate Inputs and Domestic Product Growth: Evidence from India, The Quarterly Journal of Economics, 125(4): Gollin, David, David Lagakos and Martina Kirchberger. In Search of a Spatial Equilibrium: Evidence from Geo-Referenced Micro Data in Africa. Forthcoming Hiranandani, Komal and Vaidehi Khandel Chasing Definitions in India. Mint ( Accessed 18 September Kochar, Anjini Urban Influences on Rural Schooling in India. Journal of Development Economics 74: Kundu, Amitabh Method in Madness: Urban Data from 2011 Census. Economic & Political Weekly, 46(40) Moretti, Enrico Cities and Growth. International Growth Centre Evidence Paper. Moretti, Enrico Local Multipliers American Economic Review Papers and Proceedings, 100(2): 1-7 Pradhan, Kanhu Charan Unacknowledged urbanisation: New census towns of India. Economic & Political Weekly, 48(36): Sivaramakrishnan, K.C. and Bhanu Joshi Who Rules the City? The Indian Express ( Accessed 18 September 2015.

9 RURAL EFFECTS OF URBAN GROWTH IN INDIA 9 Topalova, Petia and Amit Khandelwal Trade Liberalization and Firm Productivity: The Case of India. The Review of Economics and Statistics, 93(3):