Does Urbanization Affect Rural Poverty? Evidence from Indian Districts

Although a high rate of urbanization and a high incidence of rural poverty are two distinct features of many developing countries, there is little knowledge of the effects of the former on the latter.Using a large sample of Indian districts from the 1983-1999 period, we find that urbanization has a substantial and systematic poverty-reducing effect in the surrounding rural areas.The results obtained through an instrumental variable estimation suggest that this effect is causal in nature and is largely attributable to the positive spillovers of urbanization on the rural economy rather than to the movement of the rural poor to urban areas.This rural poverty-reducing effect of urbanization is primarily explained by increased demand for local agricultural products and, to a lesser extent, by urban-rural remittances, the rural land/ population ratio, and rural nonfarm employment.JEL codes: O12, O18, O2, 13The transformation from an agricultural and mainly rural economy to an industrial and predominantly urban economy is a typical feature of the process of economic development (Lewis 1954; Kuznets 1955).During this process, as urban areas grow, so does the productivity of their workers as a result of denser and larger markets for goods and production factors (Fujita and others 1999; Duranton and Puga 2004).However, whether the welfare gains from this process have any implications for welfare in surrounding rural areas and Massimiliano Calı `(corresponding author) is research associate at the Overseas Development Institute, UK.