the effects of population growth, the pattern of demand, and ......mohan, rakesh, 1948-the effect of...

The Effects of Population Growth, of the Patternof Demand, and of Technologyon the Process of Urbanization

An Application to India

Rakesh Mohan SWP-520

WORLD BANK STAFF WORKING PAPERSNumber 520

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WYORLD BANK STAFF WORKING PAPERSNumber 520

The Effects of Population Growth, of the Pattern

of Demand, and of Technologyon the Process of Urbanization

An Application to India

Rakesh Mohan

The World BankWashington, D.C., U.S.A.

Copyright © 1982The International Bank for Reconstructionand Development / THE WORLD BANK1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

All rights reservedManufactured in the United States of America

This is a working document published informally by The World Bank. Topresent the results of research with the least possible delay, the typescript hasnot been prepared in accordance with the procedures appropriate to formalprinted texts, and The World Bank accepts no responsibility for errors. Thepublication is supplied at a token charge to defray part of the cost ofmanufacture and distribution.

The views and interpretations in this document are those of the author(s) andshould not be attributed to The World Bank, to its affiliated organizations, or toany individual acting on their behalf. Any maps used, have been preparedsolely for the convenience of the readers; the denominations used and theboundaries shown do not imply, on the part of The World Bank and itsaffiliates, any judgment on the legal status of any territory or any endorsementor acceptance of such boundaries.

The full range of The World Bank publications is described in the Catalog ofWorld Bank Publications; the continuing research program of the Bank is outlinedin World Bank Research Program: Abstracts of Current Studies. Both booklets areupdated annually; the most recent edition of each is available without chargefrom the Publications Distribution Unit of the Bank in Washington or from theEuropean Office of the Bank, 66, avenue d'Iena, 75116 Paris, France.

Library of Congress Cataloging in Publication Data

Mohan, Rakesh, 1948-The effect of population growth, the pattern of

demand and of technology on the process of urbanization.

(World Bank staff working paper ; no. 520 (Feb. 1982))Based on author's thesis (Ph. D.)--Princeton

University, 1977.Bibliography: p.1. Urbanization-India--Mathematical models.

2. India--Population--Mathematical models. 3. Consump-tion (Economics)--India--Mathematical models.4. Technological innovations--India-Mathematicalmodels. 5. Underdeveloped areas--Urbanization-Mathe-

matical models. I. Title. II. Series: World Bankstaff working paper ; no. 520.11T1 47.I5M63 1982 307.7l6'0724 82-8600ISBN 0-8213-0008-3

ABSTRACT OF THE STUDY

This paper uses a computable economy wide dynamic generalequilibrium model to study the effect of population growth, thepattern of demand and of technological change on urbanization in thecontext of a low income developing county starting at a low level ofurbanization. The model is non-linear and models two regions (ruraland urban) with wages and prices adjusting endogenously. It representsa closed economy and is therefore more suited to a large courntry suchas India. The model is validated using Indian data and the simulationtraces the development of the Indian economy well from 1950 to thepresent. Agriculture, industry and services are the three sectorsmodelled with the latter two being defined to be located exclusivelyin urban areas and agriculture in rural areas. The three sec:tors arelinked with an input output matrix which subsumes transportat:ion costsincurred between urban and rural areas. The model is designed toinvestigate long term changes (e.g. over a thirty year period); factormobility is therefore assumed to be almost perfect. The modeldemonstrates that rapid agricultural productivity growth, high ratesof investment, and Engel curve demand effects combine to increaseurbanization as development occurs in an economy. The rate ofurbanization is not necessarily dependent on high overall populationgrowth: indeed, under certain conditions, a lowering of overallpopulation growth might speed up the rate of urbanization. The patternof demand and changes in the pattern can affect the rate of urbanizationsignificantly: in particular, the Engel-type of demand changesserve to make the process of urbanization logistic. The effects oftechnological bias are not very strong but effective appropriatetechnology policies might speed up urbanization.

ACKNOWLEDGMENTS

This paper has resulted from work originally done for myPh.D dissertation at Princeton University (Mohan, 1977). I wishto thank my advisors Edwin S. Mills and Sherman Robinson for helpfulguidance, Kemal Dervis who provided useful comments. Financialsupport for this research was provided from a grant to the PrincetonUniversity Economics Department from the Sloan Foundation and fromthe Income Distribution Project of the Research Program in DevelopmentStudies at Princeton.

The author is an economist with the Development ResearchDepartment of The World Bank.

Table of Contents

Page No.

I. INTRODUCTION: URBANIZATION IN THE CONTEXT OF DEVELOPMENT 1

II.- A SUMMARY DESCRIPTION OF THE MODEL 10

III. APPLICATION TO INDIA 20

IV. SENSITIVITY TESTS 27

REFERENCES 47

List of Tables

Table No.

1 Specification of DYNURB 12

2 National Product in Constant Prices 21

3 Growth Rates of National Product 22

4 Population of India 23

5 Experiment No. 1 29





I. INTRODUCTION: URBANIZATION IN THE CONTEXT OF DEVELOPMENT

It is now a commonplace observation that cities in poor countries

have grown at unprecedentedly high rates in the past two or three decades.

Some cities have grown from a population of less than a millioil people

in 1950 to about four million now. The provision of essential services

like water, sewage, sanitation, roads and electricity for a city growing

by six or seven percent a year is no mean task. It is not surprising

then that many policy makers view the phenomenon of urbanization with a

great deal of trepidation. Policies and measures to contain urbanization

then result: as for example, the city of Jakarta was declared closed in

1970, and a system of residence permits introduced to keep people from

migrating into the city. Other countries have tried less drastic measures

like encouraging investment in preferred areas and restricting it in

large cities. Such policies have been put into effect without a

clear understanding of the process of urbanization. We still do not

have a very good idea of the structural causes of urbanization:

economists have yet to develop specific ideas on what makes particular

economic activities characteristically urban. The phenomenon is usually

seen in a short term context and only partial explanations are generally

offerred. For example, rural/urban migration is explained by the existence

of a rural/urban wage gap; or by "push" from the country-side related to

the pattern of land holdings; or by "pull" from the cities related to

employment opportunities, bright lights, amenities of living, etc. A

proper understanding of urbanization should, however be attempted in a

long term context. What are the underlying structural cuases which create,

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these wage differentials? Why are fewer people required in farm employment

as development occurs through time? What happens to the structure of

demand which shifts the composition of goods produced to induce more

urban type activities?

Before proceeding further, a distinction must be drawn between

the growth of large cities and that of urbanization as a whole. Much of

the present concern is focused on the problems arising from the rapid growth

of large cities. This study, however, is not concerned with these problems

and views urbanization merely as the shift of people from rural to urban

areas in general. The level of urbanization is then the proportion of

urban population in total population. Its rate of growth is the growth

of this proportion. The growth rate of urban population then indicates

the growth of urbanization only when it is greater than overall population

growth. What is sought to be studied here therefore is the long-term

process in which there is a shift of people from rural habitation to urban

habitation and the structural causes thereof.

An adequate study of urbanization needs to look at the structure

of production, the patterns of demand for different commodities in urban

and rural areas and how these interact in the context of changing incomes

and technology. I attempt to do this by developing a dynamic general

equilibrium model for a large, poor developing country which is calibrated

on the post independence Indian experience. It is only an "attempt" since

the model is imperfect in that it places all industrial and service

activities in urban areas and only agriculture-related activities in rural

areas. This is obviously not strictly true but it does capture the essence

of urban and rural activities.

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Urbanization has long been associated with industrialization:

indeed they have been considered synonymous. However, cities have

existed for a long time while industry has not. Many cities evolved

originally as market or trading centers which was necessary for

product markets to expand and consequently for economic growth. Thus

cities have traditionally been more known for their "service" sector

activities than for industry. Manufacturing activities in cities are of

a relatively recent vintage but these have been more associated with

urbanization in the last two centuries because of the prominence of the

industrial revolution and all its visible fruits. Indeed, in the

development of Western countries, rapid urbanization coincided with rapid

industrialization while in the early periods the proportion of employment

in the urban service sector usually declined. The situation is now

turning full circle: services now employ a larger proportion of people

than industry in the richest countries and this proportion is ;still tending

to increase. In less developed countries, services have tended to expand

as fast as industry so that the process of urbanization is a movement of

people to both industry and services from agricultural activities. The

essential ingredient for this to be possible--both in the early stages

of Western urbanization and current LDC urbanization--is a consistent

increase in agricultural productivity. What is somewhat different for

developing countries now is that as latecomers to the development process

the labour productivity in industry is also very high. It is only the

service sector that lags in productivity changes and therefore employs

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much of the incremental urban labour. It is essential, therefore, that

models of development and urbanization explicitly take account of the

service sector: a sector neglected in most of the dual economy development

models.

It is this neglect of the service sector and the association

of urbanization with industrialization (percent of labor force in induatry

or share of industrial product) that set off the debate started by

Hoselitz (1957). He asserted that many LDCs are currently "over-urbanized"

since they have smaller proportions of labor force in industry than was the

case in European countries in the last century when they were at similar

levels of urbanization. In so doing, Hoselitz implicitly asserted a linear

relationship between the levels of industrialization and urbanization.

The other consequence of his assertion was that current urbanization is

being caused more by rural push rather than urban pull. Sovani (1962)

and Kamerschen (1969) have both questioned this implication and have

found little correlation between levels of urbanization and indices of

rural push. In refuting his over-urbanization thesis, they separately

find that the levels of urbanization and industrialization are more closely

correlated in LDCs now and in rich countries in the last century, than in

rich countries now.

These studies have been valuable in providing some insights into

the related phenomena of economic development, industrialization and

urbanization but the basic assumptions of their methodology need to be

questioned. Urbanization is essentially a dynamic phenomenon. Thus, if

there is a connection between industrialization, development and urbanization,

it should ideally be studied in a dynamic framework within the context of

-5-

one system. Doing a cross-country analysis -- as was done by Hoselitz

(1957) and Davis and-Golden (1954) -- involves the assumption that the

current cross-section of different levels of development replicates the

historical process of the system under investigation. An associated

problem with such cross-section analysis is that political entities, i.e.

nation-states are usually taken as the appropriate data points. Thus a

country as large as India is one data point as is a country as small as

Kuwait. The implicit assumption is then that nation states form self-

contained economic geographical systems. This may not be the case at all

except in large systems such as Brazil, the United States, Russia, China

and India. Such analysis would be improved if attempts were made to

group together certain sets of geographically contiguous countries which

can then more reasonably be regarded as self-contained systems. A third

problem with cross-section analysis is that linear relations of some kind

are usually posited -- particularly if linear regression analysis is used.

If, however, (a) the relationship between industrialization and urbanization

is non-linear.and (b) the trend of urbanization in a system is non-linear,

e.g. logistic, linear analysis clearly gives misleading results. Since

there is a logical limit (100 percent) to the level of urbanization,

its trend of growth is likely to be asymptotic and probably logistic like

many other growth series (Price, 1975). If this is the case, it is

not surprising that Kamerschen finds that the level of correlation between

industrialization and urbanization is low for rich countries now.

The fourth problem is a consequence-of the assumption that the

historical process can be captured by observing co-existing different levels

now. This implies that the process undergone in the last century was similar

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to that now. That this may be erroneous and that the current LDC experience

is quite different, needs some elaboration. A primary factor is that the

overall population growth rate is much higher than ever before. The

growth rate of cities is high without migration. Technical change in

agriculture which raises farm productivity has to provide for the growing

rural population in addition to the burgeoning urban population. In times

when overall population growth rates were less than 0.5 percent, a 3 percent

growth in agricultural productivity was tremendous. The second major

difference from the European experience is the coexistence of high and

low technology in LDC cities. High population growth and technological

growth makes it possible to have cities with a multimillion population at

low levels of income. This was just not possible in the last century. The

sewage disposal, water supply and transport problems of a city of 8 million

are qualitatively different from those of a city of half a million, which

was the size of major Western cities at similar income levels. The third

major difference may be the decline in relative prices of transportation

and communication. There are, therefore, reasonable a priori expectations

that the current urbanization experience of LDCs may well be different

from the historical European experience.

The foregoing is an attempt to show that cross-section cross-

country analyses of urbanization though valuable in themselves are not

likely to yield the causes of urbanization.

The contention of this study is that explanations of long-term

trends of urbanization and of its relationship with economic development

and industrialization will more likely be found if the performance of a

system is studied over time. The ideal way of doing this would be:

- 7 -

i) to catalogue the different sets of activities which takeplace in urban and rural areas;

ii) to investigate if there are underlying differences in theconduct of these activities. One example of "underlyingdifferences" is the existence of different productionfunctions in urban and rural areas;

iii) to indentify the above differences and model the productionstructure of each area;

iv) to model the demand side of the economy and devise methodsfor achieving a static equilibrium (or rules for existenceof disequilibrium);

v) to model the growth of the economy, i.e. find rules for invest-ment, population growth, etc.;

vi) simulate the system thus created and investigate the effectsof different assumptions on urbanization.

The implications of such a scheme need to be spelled out:

(a) Urbanization is being regarded as primarily an economic process;-/

(b) it is being seen as an integral part of the development process.Thus the process of urbanization is seen as a result of theinteraction of a set of complex forces in a general equilibrium(or general disequilibrium) framework.

The causes of urbanization being sought are therefore not regarded

as being simple. The answer is expected to be of the type: A, 13, C, D, E, etc.

interact together in certain constellations to produce an X level of

urbanization; rather than A produces X (e.g., rural pressures produces

urbanization).

(c) While the schema may be general enough to be applied to differentsystems, it is not expected that specific levels of appropriateurbanization can be prescribed for each level of industrializationor development. There can, however, be notions of appropriatelevels within the context of specific systems.

1/ See B. J. L. Berry (1973) for non-economic reasons for existence ofcities in pre-industrial times.

In the schema given above, (i) and (ii) are the most difficult

since they involve the interaction of spatial and production theory.

In this study, it is assumed that industrial and service activities

are exclusively based in urban areas and agricultural activities in rural

areas. Each activity has a different production function in accordance

with (iii) above, so a sharp distinction is made between the patterns of

urban and rural production activities.

The result of such an exercise can be summarized as follows:

An increase in agricultural productivity contributes to increases

in per capita income. In general, income elasticities of demand are

different for different goods, being low for agricultural goods and high

for industrial and service goods, i.e., high for urban type goods.

Surprisingly, in periods of rapid urbanization, the rate of technical

change of productivity change in agticulture is usually found to be higher

than in industry and services; that for services usually being the lowest.

Thus the process of urbanization is one that results from a number of

factors that operate simultaneously.

As an economy grows from low incomes, the proportion of income

necessary to buy food declines and thus demand is created for non-food

goods. Technical change in agriculture permits labor to be released to

work in urban pursuits. The lack of technical change or productivity

growth in agriculture would slow down the rate of urbanization. It is a

moot question to say which comes first: income growth, technical change

or urbanization. What is important to understand is that they happen,

simultaneously, one reinforcing the other. Rapid population growth is not

- 9 -

necessary for rapid urbanization. It is a popular misconception that high

population growth rates induce urbanization, though high urban population

growth rates are obviously affected by high population growth. Indeed,

the rate of growth of urbanization can increase with zero population

growth if there is accompanying technical change in agriculture and

incomes are rising. Moreover, the provision of some urban services which

may be perceived as required for urban living may themselves induce a

higher rate of urbanization and a higher rate of income growth. It is

a characteristic of recent development experience that urban capital-labor

ratios are considerably higher than those in rural areas: thus high rates

of investment are necessary for rapid urbanization. The increase in urban

labor demand at later stages, as stated earlier, is more because of

service demand than industrial demand as the rate of productivity growth

is characteristically low in the service sector.

The difference in capital labor ratios between the urban and rural

sectors is much larger now, that is for "development latecomers", than it

was for the currently rich countries in their early stages of development.

Thus the labor-using technology in agriculture and capital-using technology

in urban areas has had the effect of slowing down urbanization in LDCs.

If technology policy in these countries succeeds in introducing the

adoption of "appropriate" technology, the rate of urbanizatiorn may well

increase. Furthermore, if such policies 'attract more labor into the

industrial sector, there would be a concomitant increase in demand for

labor from the service sector. However, the importance of these

technological bias effects is usually exaggerated and their impact on the

rate of urbanization is at best secondary.

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II. A SUMMARY DESCRIPTION OF THE MODEL

The model used in this paper was designed to study the long term

process of development and structural change which can occur in a large

relatively closed economy starting from very low levels of income using

India as the model economy. A study of urbanization is therefore a by-

product of this model. This section gives a brief description of the

model (hereafter called DYNURB) and its validation of Indian data.-1

DYNURB is a non-linear, three-sector, two-region, wage and

price endogenous dynamic general equilibrium model. The three sectors

are agriculture, industry and services, with agriculture being exclusively

based in rural areas and the other two exclusively in urban areas.

Consumption of all three goods takes place in both regions and capital and

labour are mobile between sectors and regions. Transportation is an

intermediate good which is used whenever goods are transferred across

regions. The special features of the model include the specification of

transportation and that of a service sector. Particular attention is

paid to the specification of technical change which is seen as primarily

capital and labour augmenting. The model also allows for completely

exogenous (or "manna from heaven" type) technical change. The model

neglects international trade and can therefore be seen to depict a large

economy in which trade is unimportant.

The model in its present form is designed to reflect the Indian

economy in particular over a 30-year period starting in 1951, i.e.", the

1/ For a detailed description of the development, solution and validation

of the model see Mohan (1977).

period after Indian independence. It is therefore seen as a long term

model. The model solves recursively over time -- it finds an equilibrium

for a period, then grows, and then again for the next period. Such a

process may be characterized as "lurching equilibrum" as aptly expressed

(though in a slightly different sense) by Adelman-Robinson (1978). It

is recognized that this does not reflect reality where the adjustment

process takes time and capital and labor are not perfectly mobile. The

justification for ignoring this is that in a long-term context, factors

may be regarded as more mobile. Thus the model is wr6ng in that it finds

an equilibrium for every period but is probably not too misleading in

showing trends over an extended period of time.

DYNURB bears the most resemblance to the work of Kelley, Williamson

and Cheetham (1972), Kelley and Williamson (1974) and is also related to

Yamaguchi (1973), on the one hand and in its computation and modelling

philosophy to Johansen (1974), Adelman and Robinson (1978), Dervis (1973)

and Fakhruddin Ahmed (1974). Table 1 gives the mathematical specification

of DYNURB. The key features to note are:

Production: All three sectors--agriculture, industry, services- -/have constant elasticity of substitution production functions.The agriculture production function has four factors: land,livestock, capital and labour. Capital and labour "combinein a C.E.S. technology" to generate and index which is thencombined with land and livestock in a Cobb-Douglas technology.Thus a C.E.S. function is nested in a Cobb-Douglas productionfunction for agriculture. The value added production structurehas an underlying inter-industry input-output structure forintermediate goods.

1/ Sector 1, the agriculture sector, includes agriculture, forestry andlogging, fishing. Sector 2, the industry sector, includes miningmanufacturing, construction, utilities, transport and communication.Sector 3, the service sector, includes wholesale and retail trade,hotels and restaurants, banking and insurance, real estate, publicadministration and defense.

Table 1: SPECIFICATION OF DYNURB

A. The Static Model (time subscripts omitted) 4. Interregional Wage and Rental Structure

1. Sectoral Production Functions (CES) Wt 'W1 i - 2,3

Agriculture Q, - LANDALPH LVSTKGA QTBE - (4 equatons)

Industry q2 - QT2 5. Savings

Services Q3 - QT3 YLAB1 ' YiWILi i - 1,2.3

i a i YCAP - X1 R1 K1 + RENT . LAND + RLVSTK . LVSTK

QTi ' B£[Y,Ix£Kj 0, + (1-Yi) lyiLi at i i - 1,2.3 YCAPi - XiRiKi i - 2,3

(n equations) (income from labor and capital)

2. Net Price Equationsl/ YSAVE - SLABi . YLABE + SCAP .YCAPi i1,2,3

(income saved) (3n equations)*~~~~~

t tt at jp j (i - 1,2,3) 6. Demand SystemJii(n equations) YCONSi - (I-SLAB) YLABt + (I-SCAPi) . YCAPi i - 1,2,3

3. Factor Demand (Return - Marginal Product) (disposable income)

Wages: w - 1,2,3 t L i - 1,2,3

i P% - aL i i~~~~~~~~~~ 3PR-

Capital Rentals R pii aK I - 1,2,3 d i, [ j k-l Pkj * FINk POP + POPi ii~ aKi ij- k i

Land: RENT - Pit aLAND (demand for good i in sector j) i - 1,2,31; S - 1,2,3

LVSTK: RLVSTK - P aQi Price Equations

P£2 iP3 i - 1,2,3

t2 p1 1 (1 + aT ; Pl (I + aT' i- 1,2,3

(2n + 2 equations) (4n + n2 equations)

1/ These equations are actually somewhat different in the model because a transport input-output coefficient, aT has also been included.

7. Investment Demand B. Dynamic Equations

DINV YSAVE (1 equation) 1. Technical Changep22 i-I i

3. Factor Employment yi,t+l - yit(' Xti); Xi,t+j - Xit(1 + xi2) i=1,2,3

(factor augmentation)3 3

KTOT_ E K i; LTOT . Li Bi t+l = Bit (+ GB) i - 1,2,3

(Exogenous neutral technical change)

(3n equations)

URBPOP= POP2 + POP3 ; RURPOP 1 - POP1 2. Growth of Labour

URBL = L2+ L3 ; RURL = L1 (6 equations) URBLt+L = URBLT (I + CURBt)

(regional population and labor)

9. Material Balances RURLt+l - RURLt(l + GRURt)

Q = E D + EaQ LTOTt+l - URBLt+l + RURL1 i ij 1 ijj t+ + t+1

(3 equations)

Q2 ED23 + Za 2 Q; + DINV + DTRAN 3. Growth of Capital, Land, Livestockj j j

Q3 = ED + Za 3JQ KTOTt+L = KTOTt + DINVt - 6KTOTt3 3j

DTRAN = Demand for transport as an intermediate product. LANDt+I = LANDt (I + GLANDt)

(n+l equations) LVSTKt+l = LVSTKt (I + GLVSTK)

(3 equations)

10. Price Normalization 4. Savings

Qj1S P .10; Si =I i - 1,2,3 (in the first period) SLABi t+1 - SLABit (I + GSLABi)

(n+l equations) SCAP =t+l - SCAPt (1 + GSCAP i

FMINt t+l = FMIN it(1 + GFMINi )

(3n equations)

(The Static Model has 13 n + n2

+ 15 equations. With n = 3,this is 63 equations. With Walras' Law Operating, there is oneredundant equation. Thus the static model has 62 independentequations.)

List of Exogenous Variables and Parameters List of Endogenous Variables

KTOT1, LTOTI 2 Initial total capital stock, labor force Qi,Ki,Li 3n Sectoral gross outputs, capital stocks,

labor force.

LAND 1, LVSTKI 2 Land endowment and livestock Pij n2

Price of commodity i in sector j.

Yi,' xii 2n Initial sectoral labor, capital quality P it n Net prices

Bil n Production function scaling parameter Wi,Ri 2n Sectoral Wages, Capital Rentals

Yi,ai 2n Sectoral capital intensity parameter and RENT, RLVSTK 2 Land rent, return to livestockelasticity of substitution

ALPH, GAM, BET 3 Share of land, livestock, and (capital + labor) YCAP1, YLABi 2n Sectoral property, labor incomein agriculture

aij, aT n2+1 input output, transport coefficients YSAVEi, YCONSi 2n Sectoral savings, disposable income.

ei,,i 2n wage and rental differentials POPi n Sectoral population

SLABil, SCAPil 2n Initial savings rate from sectoral labor and Dii n2

Demand for commodity in i in sector jcapital income

GSLABi, GSCAPi 2n Growth rates in sectoral labor and capital DINV I Investment demandincome savings rates

WPRi n Sectoral (regional) workers participation ratio Si n Price weights

aij n2

Marginal budget share of commodity i in sector j URBPOP, RURPOP 2 Urban and Rural population

FMINi n Minimum subsistence levels URBL, RURL 2 Urban and Rural labor

Ail,lAi2 2n Labor and capital augmenting rates DTRAN 1 Transport demand

GBi n Neutral technical change rates These are 12n and 2n2

+ 8 = 62 endogeneous variables whichequal the number of independent equations in the static model.

GURB, GRUR 2 Natural growth rates of urban and rural labor

6 1 Rate of capital depreciation

GLAND, GLVSK, 2 Rate of land, LVSTK increase

GFMIN1 n Rate of increase in FMINi

Thus there are 17n + 2n2

+ 13 - 82 numbers required to run a simulationof DYNURB: a relatively small data set.

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Technical change: The C.E.S. structure allows for the most flexibleframework for modeling technical change. Factor augmentingtechnical change is allowed at different rates in differentsectors (i.e. each of Xij can be different) along with differingrates of exogenous neutral technical change (of the "manna fromheaven" type). Thus what are really freely mobile and homogenousbetween sectors are efficiency units of factors. The implicationis that when a person moves from a rural to urban area heacquires all the characteristics of the urban area, i.e. moreefficiency units. The same holds true for capital.

Transport: An input-output coefficient, aT, is added to the normalinput-output structure to regard transport as an intermediateoutput. Thus whenever a commodity is transferred from one regionto another, it is deemed to incur intermediate transport costs.Thus, when the agriculture sector uses 1 unit of good 2 (industrialgood) as an intermediate good, it also used aT units of transport.Since, in DYNURB, transport is always produced by the industrysector, this additional demand is always produced in sector 2.The net price equations then become non-linear in aij and aTand are highly "irregular" in structure.

Factor Demand and Inter-Region Wage Structure: The returns to factorsare equal to their marginal value products. Thus facto-rs aredemanded until their marginal products equal their wages orrentals. An inter-region wage structure is maintained: urbanwages are higher than rural wages but efficiency units are stillregarded as homogeneous. Thus a person earns more in an urbanarea than in a rural area (a) because efficiency units earn moreand (b) because he "embodies" more efficiency units in the urbanarea. The justification for this inconsistency is as follows:In such an aggregated model what we call "labour" is really anindex of labour inputs of different levels of skills and educationlevels. We can suppose that, in general, only higher qualitymembers of the labour force move to the urban area. These memberspossess higher than average efficiency units in the agriculturesector. Thus it can be consistently maintained that efficiencyunits of a factor are homogenous as well as perfectly mobileand are augmented at different rates in different sectors.The appropriate equalizing (within the given wage structureoutlined next) is then for the returns to the efficiency units ofthe factors. Thus, if it is sought to equalize wages acrossall sectors what is equalized is the wage per efficiency unit.The wage per person, or augmented unit, may well be different.This interpretation therefore conveniently maintains factorhomogeneity and mobility along with different rates of technicalchange.in factor quality. However, even this difference does notaccount for the total urban/rural wage differences obse-rved. Thereis ample evidence that urban and rural earnings differ for the

- 16 -

same skill and that there is no tendency for this gap tobe closed. Reasons for this are not entirely clear butamong them are the different costs of living, under-utilization of skills in rural areas due to deficiencydemands and differences in skill and education mix withinthe same professional or craft category. Whatever the reasonsare, an -inter-region v#age structure is imposed to approximatereality.

Savings: DYNURB allows for different savings rates out of labour andcapital income as well as different rates in each sector.Houthakker (1965) and Bhalla (1978) provide evidence for differentsavings rates from different sources of income and Panikar(1970) and NCAER (1965) for different sectoral savings rates.Thus the savings function is only partially Kaldorian in thateveryone saves but at different rates. Savings rates growwith time as in a developing economy.

Demand System: The Stone Linear Expenditure System is used butsavings are deemed to occur first, then committed expendituresare made (for subsistence requirements) and then discretionaryexpenditures. Ideally, committed expenditures should be madebefore savings but this form has been used here for practicalcomputational convenience. In using this function, distinctionis made between the labour force and population not usuallymade in such models: only people active in the labour forcework but the whole population consumes. One property of theStone system is that individual demand functions aggregateperfectly if all individuals have the same utility function.In DYNURB consumers in each of the 2 regions, urban and rural,are identical so aggregation can be done within regions butnot across regions. The Stone system is particularly appropriatefor modelling low income economies since we can interpret thecommitted expenditures (FMINi) as subsistence requirements. Itcan be shown 1/ that if only food is a subsistence requirement(i.e. FMIN1 > 0, FMIN2 = FMIN3 = 0) then the income elasticityof demand for food is less than unity and that for other goodsis greater than unity. Thus the Stone system captures Engeldemand effects well and is particularly suited for modelling alow income developing economy. Furthermore, the system is priceresponsive, the own price elasticity being -1 if the good is nota subsistence good and smaller in magnitude (appropriately) ifit is a subsistence good.

Population Growth: DYNURB has exogenously different natural rates-ofpopulation growth in urban and rural areas. Thus, because ofmigration, total population growth is partially exogenous.

1/ See Mohan (1977), pp. 83-85 for the derivation.

-17 -

Model Solution

DYNURB is therefore, though a relatively small mode]L, quite

complex and has a high degree of closure. Because of this, DYNURB faces

one solution problem not faced by other models in the same genre. Both

wages and capital rentals being endogenous, both capital and labour

allocations have to be determined simultaneously. Other models usually

fix either wages exogenously or capital allocations. Here,with constant

returns to scale production functions the long run supply curve is

flat. Thus, if one sector is more profitable at one level of production,

it is so at all levels. If one attempts to find equilibrium wages and

rental simultaneously, there is a tendency for all resources to shift

to the most profitable sector. One resource therefore has to be made

"less mobile" -- in this case capital -- to be able to find the solution.

Figure 1 illustrates the solution process. A set ofE initial

prices are assumed along with a set of labour and capital allocations

by sector. Total labour and capital stocks are fixed for the period.

The labour market is then solved for market clearing wages as if capital

allocations were fixed. Given resulting factor incomes, product demands

are calculated along with intermediate demands and investment. Excess

demand equations are formed and prices changed in response. The labour

market is then solved again followed by the product market until a set

of market clearing wages and product prices are found - all the while

acting as if capital allocations were fixed. It is only then that an

excess demand capital equation is formed and capital rentals changed

accordingly resulting in a revised allocation of capital. This allocation

-18-

-iue1:- The Solution of DYNURB

Ki tLi t Pi

_ > Net Prices

- Outputs

| Wages >>,

.L demands(4

Laor Make

|K Rentals F( L2) I

DemandSystem

4 Prodct M, rket>

- | ~~~~Prices l

. ~~Solution :To Next PeriodK Rentals.

3)

I I

- 19 -

is then treated as fixed and the whole process repeated until a final

solution is reached in all markets: the labour market, the goods

markets and the capital market are all in equilibrium and give a set

of solution wages, rentals and prices. Associated with these are

sectoral capital and labour allocations and outputs. Thus the model

essentially solves 5 markets: the markets for labour and capital and

the markets for the 3 goods. The efficiency labour and capital are

homogeneous and have a given intersectoral wage structure. Each is

therefore regarded as an economy-wide market. The solution technique

can be regarded as simulating a market economy: capital is "less mobile"

than labour and prices adjust in response to excess demands. As mentioned

earlier, if labour and capital are made equally mobile, i.e., solved

simultaneously, the constant returns to scale nature of the production

function shifts all production to one sector. Capital is therefore

"artificially" fixed for the solution of the labour and goods markets.

As shown in Table 1, the number of equations in DYNURB is

equal to the number of endogenous variables in the static model. This

provides assurance that a solution is feasible. With neoclassical

production functions and the demand system used, it is reasonable to expect

that a unique solution exists for the model. This study does not

investigate the existence properties of the model, nor its stiability

properties any further. However, given that there is more than one

consumer, the theoretical probability of non-uniqueness exists.

Practically, it is likely that the solution is, indeed, unique since

various initial conditions were found to lead to the same solution.

- 20 -

III. APPLICATION TO INDIA

DYNURB was tuned to approximate the Indian economy in 1950.

Parameter values were selected, as far as possible, from existing studies

6n India so that they were close approximations to actual estimates. Some

(e.g. the elasticity of substitution in agriculture) were mere guesses

if no estimates existed. In addition intial values had to be chosen

for variables such as total factor stocks to start off the simulation.

This section presents selected results from the base simulation (hereafter

called the BASRUN) which is regarded as tracking the Indian economy

quite well.

Table 2 shows the result of the BASRUN along with actual values

for India for the growth in total output. The two sets of series are

in remarkably close agreement considering the many unrealistic assumptions

incorporated in DYNURB. The income lags somewhat towards the end of the

period. This is probably because

i) population growth tends to slow down in DYNURB withincreasing urbanization;

ii) the last year for which data is shown, 1974-75, was the thirdof a succession of bad years in India.

Table 3 shows the BASRUN growth rates of gross national product

along with those for per capita national product. The feature toy note

is the acceleration of growth rates. The DYNURB economy grows faster and

faster with the passage of time. Estimates for growth in GNP in different

period for India are given below:

1949 to 1955 2.92%1954 to 1961 3.63%1961 to 1967 3.61%1949 to 1969 3.41%1954 to 1969 3.62%

(Dholakia, p. 20)

- 21 -

Table 2: NATIONAL PRODUCT IN CONSTANT PRICES

(Index, 1951 = 100)

BASRUN ACTJALYear GNP Per Capita GNP Per Capita

1 2 3 4

1951 100 100 100 100

1954 110.7 104.5 114 107

1957 122.7 109.4 124 110

1960 136.4 114.8 134 112

1963 151.7 120.7 151 118

1966 169.1 127.1 166 121

1969 188.5 133.9 184 129

1972 210.5 141.2 210 137

1975 235.5 149.2 217 136

1978 263.5 157.6

1981 295.0 166.7

1984 330.5 176.5

SOURCES: Cols. (1), (2) BASRUN Simulation.

Cols. (3), (4) Dholakia (1974), Government of India(1976), M. Mukherjee (1969).

NOTES: (1) The simulation results are in constant 1951 prices.

(2) The "Actual" data are in 1948-49 prices for theyears 1951 to 1966, while later years are in1961 prices.

- 22 -

Table 3: GROWTH RATES OF NATIONAL PRODUCT

(percent per year)

Year Growth RatesFrom 1951 to: GNP Per Capita

1954 3.45 1.49

1957 3.48 1.52

1960 3.51 1.55

1963 3.54 1.58

1966 3.56 1.61

1969 3,59 1.63

1972 3.61 1.66

1975 3.63 1.68

1978 3.65 1.70

1981 3.67 1.72

1984 3.69 1.74

SOURCE: BASRUN Simulations.

DYNURB's success in tracking the Indian development record over

25 years gives reason to believe that the structure of the model is plausible

and that the parameters used are well founded even though they were not

systematically estimated.

- 23 -

Correspondence between these estimates and the BASRUN is good. The average

for the later-years, 1969-75, however, is not as high as suggested by DYNURB.

This is partly because of unusually adverse weather conditions during

1972 to 1975.

Table 4 shows the population of India as estimated in DYNURB

as compared with the actual data.

Table 4: POPULATION OF INDIA(in millions)

Year BASRUN Actual a/

1 2

1951 362 361

1961 430 439

1966 482 485

1971 540 548

1974 571 577

1981 640 695 b/

1984 678

Source: (1) BASRUN, Table A.8

(2) a/ Up to 1974, Government ofIndia (1979), p. 2 (takenfrom the Indian Census).

b/ 1981, Bose (1973), p. 423,estimate.

That population is estimated well by DYNURB is not very surprising because

the urban and rural natural population growth rates are exogenously specified.

The only endogeneity is caused by rural/urban movement and therefore the

model is also tracking that movement well.

The definition of urbanization places all labour that works in

industry and services in the urban region even if some of the activities

- 24 -

are actually located in the rural region. Thus, while the actual level

of urbanization in India was 17.3 percent in 1951, and 19.9 percent

in 1971, in the BASRUN the levels were 26.7 percent and about 32 percent

for the two years respectively. The levels were are not comparable but

the trends are:Growth Rate of Urban PopulationBASRUN Actual

1951-61 2.96 2.64

1951-71 2.84 2.96

It is clear therefore that DYNURB models the trend of

urbanization well. A model such as this can then give a benchmark

against which we can measure the rate of a country's urbanization. If

the structure of such a model ia regarded as sound then the rate of

urbanization given by simulation can be regarded as the trend that

"ought" to exist in the modelled economy. If the rate of urbanization

is faster in the actual economy it is then, perhaps, justified in calling

it over-urbanized. Recall, however, that DYNURB assumes full employment:

thus a higher rate of urbanization in the actual economy accompanied

by rising urban unemployment would be a good index of over-urbanization

This is, in principle, better than an internationally derived norm from

cross sector data. An improvement of DYNURB which could allocate some

industry and service employment to rural areas would give better answers

to the appropriate level of urbanization as a country develops over time.

The model was further validated by examining the sectoral

distribution of output and factor stocks as they changed over time in the

30 year simulation of DYNURB. These distributions compared well with actual

data giving further confidence in the structure of DYNURB.

- 25 -

In summary, therefore, the simulation shows that the transfer

of labour from rural to urban areas is as much to service sector occupations

as to industrial occupations. Thus it is essential to study structural

change in at least a 3-sector context as distinguished from the usual

2-sectors. As evidenced from the demand coefficients used in the

simulation, the demand for services is particularly significant in urban

areas and its neglect, therefore, would miss one of the most important

components of structural change in a growing economy. Other key results

from the simulation include confidence in the modelling of technical

change. Its essential ingredients are:

(i) A labour-saving bias in urban areas along with a aapitalsaving one in rural areas.

(ii) A higher rate of technical change in agriculture comparedwith the other two sectors. This is essential to provideenough food for the increasing population and for theincreasing urban, i.e., non-rural based demand.

(iii) Capital and labour augmentation account completely fortechnical change in the urban based sectors but"unexplained" change is necessary in the agriculturalsector.

The BASRUN also shows that even with a "respectable" savings

and investment rate a very low income economy like the one simulated

has difficulty achieving very high rates of growth: particularly per

capita growth when population growth rates are high. This is partly

caused by the large proportion of consumption expenditures being required

for food subsistence purposes. Thus, as population grows, much of the

investment has to be directed towards agriculture to keep food production

in line with population growth. Correspondingly, the pace of structural

change, i.e. urbanization and industrialization is slow,

- 26 -

Cause and effect are characteristically difficult to separate

in a general equilibrium model. The next section provides a better

idea of some of the underlying causes of structural change through the

use of sensitivity tests of the model, now that its plausibility has

been demonstrated.

- 27 -

IV. SENSITIVITY TESTS

Cause and effect are characteristically difficult to disentangle

in a general equilibrium model -- even when it is a relatively small one

such as DYNURB. Moreover, as has been pointed out, though small in size,

DYNURE has a high degree of closure and hence the relationships among

its parts are complex. Analytical results are virtually impossible.

So sensitivity tests have to be used to obtain a better understanding

of the workings of the model and, by inference, of the economy it represents.

Drawing strong conclusions from the results of sensitivity tests on a

simulation model is, however, hazardous. It is not easy to distinguish

results caused by technical quirks in a model from those that are

consequences of the structure of the economy.

A large number of tests were conducted, each of which involved

a change in one of the parameters. In this paper I investigate the effects

of different rates of population growth, of changes in the pattern of demand

and of the role of different kinds of technology on the process of

urbanization. In so doing one also obtains a number of insights into the

development process, but I concentrate on urbanization here. One general

result worth reporting is that the dynamic general equilibrium system

incorporated in DYNURB behaves much like a buffalo -- as does the Indian

economy! Exogenous shocks, i.e. changes in parameter values, do not make

radical differences in the growth path of the economy -- even when these

changes are of a substantial magnitude. A shock in one component produces

- 28 -

ripples across the economy and equilibrating forces are set in motion

dampening the long run impact. This is what should be expected from a

general equilibrium system with an unchanging structure.

Population Growth

The experience of extremely high rates of urbanization in LDCs

in recent decades has partly been attributed to high population growth

rates. Thus, tests are conducted here to judge the quantitative

effects of different rates of population growth. A range of tests was

performed with small changes in the growth rates (GURB and GRUR) and

with large changes. Tables 5 and 6 report the extreme results: those

with zero population growth and with a growth rate of 2.5 percent per

year. The latter is high by Indian standards though Latin American

population growth rates are characteristically in the region of 3 percent.

The most interesting result is that with zero population growth,

(ZPG), urbanization proceeds at a more rapid rate as shown in Table 5.

In 33 years, the level of urbanization is about 42 percent as opposed

to 35 percent in the BASRUN. The reasons are not difficult to find.

With ZPG, the growth of per capita income is greater and with the income

elasticity of demand for food being less than unity, the shift in consumption

patterns toward urban goods is correspondingly faster. This shift would

be even more significant if another demand system was used in which all

income elasticities did not approach unity in the long run.-/ The

absence of the additional demand for food from increased population and

a faster shift to urban goods produces an increased demand for urban labour

1/ This distortion is not critical at low levels of income where subsistencerequirements are still substantial.

- 29 -

Table 5: EXPERIMENT No. 1

Zero Population Growth GURB = GRUR = 0.0 (NEWRN)(See Notes Below) GURB = 0.017, GRUR = 0.020 (BASRUN)

1951 1963 1972 1984

1. GNP Per Capita Growth BASRUN - 1.58 1.66 1.74

Rate (% per year) NEWRN - 2.39 2.40 2.41

2. Level (% Urban) BASRUN 26.73 30.04 32.25 35.01NEWRN 26.73 33.01 37.01 41.74

(% Difference) 9.87 14.74 19.23

3. Growth Rate of BASRUN 0.98 0.90 0.82

Urbanization NEWRN 1.77 1.56 1.36

(% Difference) 81.25 73.73 65.61

4. Growth Rate of BASRUN 2.92 2.84 2.76

Urban Population NEWRN 1.80 1.59 1.39

Notes on Tables on Sensitivity Tests

Results of experiments are reported in the same format

for each case.

1. BASRUN - The value of the variable in the BASRUN which tracked

Indian economy well.

2. NEWRN - The results of simulation with the change in parameter

as noted above the table.

3. Percentage Difference - Percentage change in variable at time

t as compared with-value in the BASRUN.

4. Growth Rate of Urbanization: This is the growth rate of the

urbanization level, i.e., the growth rate of the share

or urbanization.

5. Growth Rate of Urban Population: This is the growth rate of

total population in urban areas.

- 30 -

and consequently increasingly higher levels of urbanization. This result

depends on the assumed rates of technical change which permit labour to

be released from agricultural production. To the extent that agricultural

terms of trade tend to deteriorate, it would be reasonable to expect an

induced effect on the rate of innovation in agriculture. Indeed, the

rate of technical change could slow down, thus requiring more labour

in agriculture and consequently resulting in a slower urbanization rate.

To predict such changes, a more sophisticated theory of technical change

is required which, alas, DYNURB does not incorporate. Here only

different possibilities can be investigated.

Although the rate of urbanization is increased significantly

the rate of growth of urban population obviously declines. The important

point, however, is that these growth rates are significant (line 4, Table 5),

even with the extreme assumption of ZPG. With more reasonable assumptions,

i.e., natural population growth rates of between 1 to 2 percent per year,

the rate of growth of urban population is in the range of 2.0 to 2.5

percent per year as compared with about 2.8 percent in the BASRUN. The

lesson then is that a decrease in the natural growth of population will

not remove urbanization problems in LDCs. The six to seven percent

urban population growth rates characteristic of some Latin American

countries would only decline to 4 to 5 percent if the natural population

growth decreased to about 1.5 percent from the current 3.0 percent:a year.

These results are very important because they demonstrate that

the decline in birth rates (or population growth) is not going to solve

the urbanization problem and that we can expect cities to grow along with

the development process. This is already being observed in Latin America

where population growth rates have declined drastically in recent years

- 31 -

from about 3.0 percent to about 1.5 to 2.0 percent a year. Cities are indeed

continuing to grow at rates of 4 to 5 percent per year instead of the

earlier 6 to 7 percent. The early Japanese development experience

in the Meiji era was somewhat similar to this characterization.

Agricultural productivity had increased but the growth rate of population

was low. Consequently, a relatively small increase in agricultural

productivity did result in significant income changes and high rates of

urbanization.

It is worth delving further into the simulation resuLts to

understand the mechanism of DYNURB which produces these results. The

most dramatic result in the ZPG simulation is the reversal in the terms

of trade making urban goods more expensive. This has a dampening effect

on the demand for urban goods including capital goods. The proportion

of net investment to GNP declines: the economy indogenously adjusts

for a slower populatin growth rate. The converse happens with an increase

in population-growth: the proportion of investment increases, thereby

mitigating somewhat the negative effect on per capita incomes. Note,

however, that the change in investment decreases in later years and

would probably equal the BASRUN in a long enough simulation in both

cases. The economy therefore has built in stabilizing influences over

the long run which can only be captured by a general equilibrium model.

To the extent that these influences tend toward a dynamic equilibrium,

the implication is that policy choices may not make a substantial

difference over a long period, but do over a period like 5-15 years.

Put another way, policy choices can determine the path taken by an economy

to reach an objective but perhaps not the objective itself.

- 32 -

Table 6: EXPERIMENT No. 2

High Population Growth: GURB = GRUR = 0.025 (NEWRN)

(BASRUN GURB = 0.017 GRUR = 0.020)

1951 1963 1972 1984

1. GNP Per Capita Growth BASRUN 1.58 1.66 1.74

Rate (% per Year) NEWRN 1.34 1.43 1.52

2. Level (% Urban) BASRUN 26.73 30.04 32.25 35.01

NEWRN 26.73 29.14 30.88 32.74

(% Difference) - -3.00 -4.25 -6.50

3. Growth Rate of BASRUN - 0.98 0.90 0.82

Urbanization NEWRN - 0.72 0.69 0.62

(% Difference) -26.18 -23.20 -24.98

4. Growth Rate of Urban BASRUN - 2.92 2.84 2.76

Population NEWRN - 3.23 3.20 3.12

As should be expected with ZPG, wages increase substantially, K

rentals decline and therefore the wage rental ratio increases with a

corresponding increase in the overall capital labour ratio. Since the

elasticity of substitution between capital and labour is 1.2 in

agriculture, capital is substituted for labour to a larger extent in

that sector and the labour share consequently declines despite a

substantial rise in wages. The implication is that if the elasticity

of substitution in the two urban sectors was higher than the assumed

0.6 and 0.8, more capital would be employed, demand for labour would

decline and wages would tend to decrease. (Some of these effects are

investigated later in experiments with the elasticities of substitution).

When population growth rates are low, low elasticities of substitution

aLe better for labour!

- 33 -

The opposite result holds for high population growth. Higher

elasticities of substitution in the urban sectors would increase the

demand for labour, cause higher wages and a higher urbanization rate.

Those who call for "appropriate technologies" and a better allocation

of factors in the interest of employment generation in the context of

high populationgrowth, should be aware that higher urbanization rates

will be one of the results of such policies. This result is not

dependent on the assumption of full employment. It would be the same

even if unemployment is allowed and migration behaviour conforms with

the Harris-Todaro (1970) hypothesis or one of its variants.

The share of the service sector in total output increases more

than that of industry. Thus labour absorption in urban areas is more

due to service sector expansion. A model not including the service

sector would not have this detail and would therefore show a slower rate of

labour absorption. It is the neglect of the service sector or its

perception as a sponge that lead to fears of widespread urban unemployment

along with high urbanization growth rates. The explicit inclusion of the

service sector in DYNURB is therefore once again shown to be illuminating

a crucial aspect of development and urbanization. Recall the the relatively

faster growth in the demand for service goods is determined in DYNURB by

specification of the demand parameters. The conclusions drawn above

therefore depend on the validity of the numerical magnitudes used. These

have already been justified, hence these conclusions must be deemend

to be valid.

- 34 -

The last result of ZPG worth noting is that the increase in

the growth of per capita income is not striking and that the difference

relative to the BASRUN declines over time. The implication is that,

ceteris paribus, over a long enough period, a high population growth

rate does not necessarily mean a smaller growth in per capita income.

This is partly because endogenous adjustments induce a higher investment

rate. What is true, though, is that per capita income is increased

with lower population growth in the short run and it is likely that

such increases cause other structural changes which make the growth

self sustaining.

This last point is worth emphasizing in the modelling context.

In any structural model like DYNURB the basic structure of the economy is

assumed to be stable over the long run. In reality, a short run

large increase in per capita income can cause a snowball effect which

then makes growth self-sustaining. The foreign sector is not modelled

at all in DYNURB. One of the usual effects of high per capita income

growth for a few years is a major improvement in a country's rating

in credit markets and the resulting large inflow of foreign investment

and credit. Such may have been the case for Korea where large U.S. aid

programs in earlier years resulted in income increases in those years and

were then followed by self sustaining accelerated growth along with

a substantial flow of foreign credit. DYNURB is clearly not equipped

to deal with such systemic responses to a changing situation. Nevertheless,

it serves to show that the rate of populatioh growth, while undoubtedly

important, as a dampening influence in a country's growth path may not

- 35 -

be as important as is sometimes made out. Moreover, those who are

concerned with the problem of rapid urbanization should realize that

a slow down in population growth will not solve their problems.

The experiments on population growth do not allow for

differential growth rates between population and labour. The participation

rate is assumed to be constant though different for urban and rural

areas. A richer demographic sub-model would allow the modelling of

changes in age structure over time -- in particular, the lag between

population growth and labour force growth.

Changes in Demand Patterns

Discussions of development and urbanization are typically

supply oriented. Thus, a large amount of attention is paid to the

possibilities of increasing efficiency in production, to inappropriate

choice of techniques, to the rate of population growth and so on.

It is usually assumed that Say's Law holds in low income countries, i.e.,

that whatever is supplied will be consumed and that the important

constraints are to do with supply. Phenomena such as the "embarrassment

of riches" associated with the recent bumper harvests in India indicate that

demand constraints may be as important. Thus the effects of changes

in demand patterns are investigated with some care in this study.

Two sets of experiments are reported. One set reports the effects

associated with changes in marginal budget shares (a ijs) and the other,

those associated with changes in perceptions of subsistence requirements.

Recalling the derivation of the Stone demand system from its

associated utility functions, it is fair to say that the set of experiments

with changing marginal budget shares is really investigating the effects

- 36 -

of changing consumer tastes. It is somewhat surprising when viewed in

this manner, that growth rates of real income can be affected by a mere change

in preferences.

Table 7 reports the effects of an increased preference for food

in urban areas. Another experiment simulated an increased preference for

urban goods in rural areas. The results of one experiment are the converse

of the other. Thus, only the results of Experiment 3 are discussed.

As a result of the shift in urban demand in favour of food and

away from urban goods (the experiment performed makes the urban demand

pattern identical to the rural pattern), the level of urbanization decreases

in the initial year and continues to decrease relative to the BASRUN in

later years. The growth rate of urbanization decreases as well. Thus a

change in preferences produces a comparative static result which tends to persist

over time. In the BASRUN simulation it was assumed, in conformance with

the Indian consumption pattern, that people in rural areas tend to consume

more food than service goods as compared with the people in urban areas.

In this experiement therefore we are merely testing what happens if

everyone had rural preferences, i.e. the rural demand pattern prevails

everywhere. The shift in demand towards agriculture increases the share of

agriculture in total product and resources shift to that sector accordingly.

Given that agriculture is a less productive sector (in the sense that an

equivalent amount of resources produce less value added> the level of

GNP decreases in the initial year and continues to decrease relative to the

- 37 -

Table 7: EXPERIMENT NO. 3

Increase in Urban Demand for Food l/

1951 1963 1972 1984

1. GNP Per Capita Growth BASRUN - 1.58 1.66 1.74Rate (% per year) NEWRN - 1.53 1.60 1.68

2. Level (% Urban) BASRUN 26.73 30.04 32.25 35.01

(% Difference) -11.60 -12.12 -11.92 -12.30

3. Growth Rate of BASRUN - 0.98 0.90 0.82Urbanization NEWRN - 0.93 0.88 0.80

(% Difference) -5.10 -1.68 -2.97

4. Growth Rate of BASRUN - 2.92 2.84 2.76Urban Population NEWRN - 2.87 2.83 2.74

Note 1: Demand coefficients in the urban sector are made equal to those inrural sector, i.e.,

Ag. Goods: 0 11 012 = 013 - 0.4. (0.25)

Ind. Goods: 021 - 022 - 023 8 0.25 (0.20)

Serv. Goods: 031 - 032 - 033 - 0.35 (0.55)

(BiJ is the budget share of good i for a consumer in sector j)

Figures in parentheses are the BASRUN Urban Sector demandcoefficients.

- 38 -

BASRUN levels in later years. The economy wide growth rate is lower.

Since urban based income decreases, and because urban savings rates

are higher than rural rates, the level of total investment in the

economy declines.

It is found, therefore, that a shift in urban consumer tastes

toward food has important effects on levels of income in the short as well

as over the long run. What are the effects of the converse case: when

rural preferences shift toward urban goods and larger marginal budget shares

are spent on these goods. Such a change induces a faster growth rate

of income and higher urbanization levels. 29.2 percent of the

population in the intial period is urbanized as compared with 26.7 percent

in the BASRUN. Such a difference persists over 20 years and is therefore

a non-trivial effect.

The effects discussed above are to be distinguished from Engel

effects which are only due to different income elasticities of demand for

urban goods ( >1), and for agricultural goods ( <1). The increased prefer-

ence for urban goods stimulates a further structural change which could

appear with rising income causing a shift away from rural goods. A better

experiment would be to make the as variable over time so that the shift

away from agricultural goods takes place along with rising income. The

results indicate that the effects of such a structural change would be to

reinforce Engel effects and to induce a progressively higher rate of

growth of income and of urbanization.

- 39 -

Subsistence Requirements

It is assumed in the simulation of DYNURB that consumers regard

only food as a subsistence good and that this is some absolute nutritional

minimum which remains the same over time. The next set of experiments

investigates the effects of changes in the perception of consumers as to

what constitutes subsistence goods. It is sometimes argued that sub-

sistence requirements rise over time along increases in income. Experi-

ment 4 investigates the consequences of such a shift in requirements, so

that FMIN (1), the amount of food required to subsist, increases at a

rate of 1.5 percent per year. Other experiments were conducted with a

once and for all increment or decrease in FMIN (1). Their results were

consistent with those reported from Experiment 5.

The effects on the level and rate of urbanization are dramatic.

The economy begins to ruralize! In 1984 the level of urbanization de--

clines to 24.2 percent of population from 26.7 percent in 1951. The

BASRUN level in 1984 is 35.0 percent. The growth rate of urban popula-

tion is still positive though only 1.60 percent per year. The increased

demand for food tends to shift resources to the agriculture sector where

there is a higher preference for food as compared with urban goods.

This serves to reinforce the effect and the economy begins to ruralize.

All these results should be expected but what is surprising is the

magnitude of the effect. The per capita income growth rate declines

from about 1.75 percent to 1.5 percent. The share of agriculture is

12.3 percent higher in 1984 than was the case in the BASRUN. The magnitude

of these effects is important if this experiment is considered in the

context of a nutrition or food subsidy program being designed in a

- 40 -

Table 8: EXPERIMENT NO. 4GROWTH IN SUBSISTENCE FOOD REQUIREMENTS

GFMINI 0.015 NEWRN

GFMIN1 0.0 BASRUN

1951 1963 1972 1984

1. GNP per Capita BASRUN - 1.58 1.66 1.74Growth Rate (% per year) NEWRN - 1.41 1.46 1.51


(% Difference) 0 -14.63 -22.52 -30.77

3. Growth Rate of Urbaniza- BASRUN - 0.98 0.90 0.82

tion NEWRN - -0.34 -0.32 -0.30

(% Difference) - -135 -136 -136

4. Growth Rate of Urban BASRUN - 2.92 2.84 2.76

Population NEWRN - 1.56 1.60 1.62

1/ GFMIN1 is the growth rate in minimum food requirement FMIN The BASRUNhad assumed that subsistence requirements remain constan .

- 41 -

relatively closed economy. Where such a programme is being financed from

tax revenues, it can approximately be interpreted as increasing the food

subsistence requirement since taxes paid by consumers may be regarded as

increased allocated price-insensitive expenditures on food. Note that the

increase in food requirements is set at only 1.5 percent per year.

A converse experiment was also performed (but not reported here

in detail) where urban goods were also included in the subsistence bundle.

It is often argued that urban dwellers have minimum needs in terms of

urban infrastructure and housing such that they have a higher proportion

of allocated relatively price-insensitive expenditures. The mere provision

of necessary urban services such as roads, water supply, sewerage, etc. may

be regarded as constituting such expenditures if they are financed through

tax revenues. This is simulated in DYNURB by including both the urban goods

in the subsistence bundle (i.e., FMIN2 and FMIN3 > 0). The result is inter-

esting: since there is now higher "forced" consumption of urban goods,

resources shift to urban areas leading to a substantial increase in the

level of urbanization, GNP and per capita income in the initial period.

Income continues to grow somewhat faster though the effect is alternated

in the long run. The growth rate of urban population declines somewhat

since it now starts from a higher base. The conclusion is therefore a

surprising one. The provision of some minimum level of urban goods and

services produces an increase in income levels as well as growth rates

along with a higher level of urbanization. Such provisions should there-

fore not be assumed to be a drain on the economy. Urban infrastructure

investments are, apart from their other justifications, therefore "product-

ive" in their own right in that they induce higher levels of incomes in the

economy through their multiplier effects.

- 42 -

The overall conclusion from the demand experiments is that demand

patterns matter and that changes which occur along with increases in income

and development can have reinforcing effects that accelerate the development

process. These results are consistent with the findings of Kelley, et. al.

(1972). Nutrition and food subsidy programmes can have some surprisingly

strong deleterious effects on growth while the provision of urban goods and

services as subsistence goods may have beneficial effects..

Technical Change: The Relevance of the Elasticity of Substitution and Appro-

priate Technology.

There is a widespread belief that the technology used in urban areas

in LDCs is, in some sense, inappropriate. It is argued that the factor pro-

portions used do not reflect prevailing factor prices well: in particular,

industry is 'too capital intensive.' A large amount of literature is

developed on the question of 'employment generation.' It is argued that the

use of appropriate technology would make processes more labour intensive

and therefore help in solving the problem of urban employment. The question

of appropriate technology is really a debate on the existing value of the

elasticity of substitution. If the value is unity, there is then little

justification in the argument that factor proportions do not respond to

changes in factor prices. Thus a set of experiments was done with different

elasticities of substitution. These experiments also tested the sensitivity

of DYNURB to these technology parameter assumptions since, to some extent,

the production function parameters were the least well informed -- especially

for the service sector.

- 43 -

Various experiments were conducted but only one is reported here

where all the elasticities of substitution are set at unity and all the

production functions become Cobb Douglas functions. (In the BASRUN the

elasticity of substitution between labour and capital was set at 0.6 for

industry, 0.8 for services and 1.2 for agriculture). One general result

from the experiments is that the economy gains in efficiency the nearer

each elasticity moves toward unity.

Experiment 5 (Table 9) shows the effects of what might be char-

acterized as appropriate technology. The assumption of all Cobb-Douglas

production functions amounts to a technology which responds tc, changes in

factor prices perfectly. The technology experiments show that: any other

elasticities induce efficiency losses. The striking result is that it is

not too different from the results which had Cobb-Douglas technology in

agriculture only. The main difference is that K rentals increase, which

implies that capital is being used more efficiently. That labour share

declines significantly in the urban sector by the end of the simulation

period. This result is somewhat reminiscent of a wage equalization experi-

ment where higher efficiency and income growth were accompanied by income

losses to urban labour and a higher rate of urban labour absorption.

The conclusions from this set of experiments are:

e The choice of technique or elasticity of substitutionmatters. However, the effects of choices within areasonable range do not appear to be significant enoughto warrant the large amount of literature devotedl to thelabour absorption issue.

* Efficiency losses do occur the further a is from unity."Smooth" production functions induce efficiency.

- 44 -

Table 9: EXPERIMENT NO. 5

All Production Functions: Cobb-Douglas 1/

a = 1.0 a = 1.0 a = 1.0 NEWRN1 2 3

o = 1.2 a = 0.6 a = 0.8 BASRUN1 2 3

1951 1963 1972 1984

1. GNP Per Capita Growth BASRUN - 1.58 1.66 1.74Rate (% per year) NEWRN - 1.80 1.92 1.99


(% Difference) 0.04 3.85 4.87 4.35

3. Growth Rate of BASRUN - 0.98 0.90 0.82Urbanization NEWRN - 1.29 1.13 0.95

(% Difference) 32.24 25.22 15.69

4. Growth Rate of Urban BASRUN - 2.92 2.84 2.76Population NEWRN - 3.25 3.07 2.89

Note 1. B , the production function scaling parameters are adjusted toeuate g.n.p. in the initial period between BASRUN and NEWRN.

- 45 -

o The choice of appropriate technology is associated withsignificant efficiency gains but not necessarily withemployment generation. Indeed, low elasticities ofsubstitution may be generating higher employment as wellas wages. Capital owners may gain relatively more as aresult of better utilization of capital!

o The rate of urbanization increases with appropriate tech-nology. This is mostly because of the labour releasedfrom the agriculture sector where that labour using sector'selasticity of substitution is reduced from 1.2 to 1.0.

Factor Augmentation, Bias and Technical Change.

Further sets of experiments were conducted to investigate the

effects of different types of technical change in the pace of urbanization.

The quantitative results are not reported here but may be found in Mohan

(1977)-/. The BASRUN assumed a large neutral exogenous technical change in

agriculture since no reasonable rates of factor augmentation prcduce the

observed rate of total factor productivity change in agriculture. Such a

neutral change is also probably appropriate for a green revolution type phenom-

enon in agriculture. The key result is that a decline in this neutral technical

change produces a very large decrease E the rate of urbanization. Essentially,

a smaller rate of increase in income mitigates the Engel type demand effects

and there is therefore a smaller demand for urban type goods and consequently

for urban labour. The best prescription for containing urbanization is

therefore stagnating agriculture' An improvement in rural cond:Ltions is

therefore not likely to result in slower rates of urbanization as supposed

by some. When the bias of technical change is reversed, that iE; the rate of

capital augmentation is made uniformly greater than that of labour, demand for

labour increases in the two urban sectors and therefore the level and rate of

1/ See pp. 261-269.

- 46 -

urbanization increases. Industry and services now have a labour using bias

while agriculture has a capital using bias.

In conclusion it is clear that the rate of urbanization does depend

on the nature of technical change. Neutral technical change in agriculture

produces a greater shift to urban areas than technical change which has a

labour using bias. The reversal of bias in the technology, where the urban

sectors become labour using, also increases the rate of urbanization as

expected. The effect is small in magnitude relative to the rather significant

change in the nature of technology that uses it. In general, greater effi-

ciency and labour use generating technology changes induce a higher rate of

urbanization.

- 47 -

REFERENCES

Adelman, Irma and Robinson, Sherman. Income Distribution Policy inDeveloping Countries: A Case Study of Korea, Stanford, California,Stanford University Press (1978).

Ahmed, Fakhruddin. Migration and Employment in a Multi-Sector Model --An Application to Bangladesh, Princeton University, unpublished Ph.DDissertation 1974.

Berry, Brian, J.L. The Human Consequences of Urbanization. New York:St. Martin's Press (1973).

Bhalla, Surjit, S. "The Role of Sources of Income and InvestmentOpportunities in Rural Savings", Journal of Development EconomicsVol. 5, No. 3 (September 1978).

Bose, Ashish. Studies in India's Urbanization - 1901-1971. New Delhi:McGray Hill, 1973.

Davis, Kingsley and Golden, H.H. "Urbanization and the Development of Pre-Industrial Areas", Economic Development and Cultural Change Vol. 3,No. 1 (October 1054), pp. 6-24.

Dervis, Kemal. Substitution, Employment and Intertemporal Equilibriumin a Non-Linear Multi-Sector Planning Model for Turkey, PrincetonUniversity: Unpublished Ph.D. Dissertation (1973).

Dholakia, Bakul H. The Sources of Economic Growth in India, Baroda.Good Companions (1974).

Govt. of India (G.O.I.). Central Statistical Organization. NationalAccounts Statistics: 1960-61 - 1973-74, New Delhi (1976).

Harris, J.E. and Todaro, M.P. "Migration, Unemployment and Development:A Two-Sector Analysis", American Economic Review, Vol. 60 (March

1970), pp. 126-142.

Hoselitz, Bert F. "Urbanization and Economic Growth in Asia", EconomicDevelopment and Cultural Change, Vol. 5 (October 1957), pp. 42-54.

Houthakker, H.S. "On Some Determinants of Saving in Developed and Under-

developed Countries", in E.A.G. Robinson (1965).

Johansen, Leif. Production Functions: An Integration of Micro and MacroShort-Run and Long-Run Aspects, Amsterdam: North Holland (1972).

. A Multi-Sectoral Study of Economic Growth, Amsterdam:

North Holland (1974).

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Kamerschen, David R. "Further Analysis of Over-urbanization", EconomicDevelopment and Cultural Change, Vol. 17 (January 1969), pp. 235-253.

Kelley, Allen C. and Williamson, Jeffrey, G. Lessons from JapaneseDevelopment:. An Analytical Economic History, Chicago: University ofChicago Press (1974).

Kelley, A.C., Williamson, J.G. and Cheetham, R.J. Dualistic Economic Devel-opment Theory and History, Chicago: Univ. of Chicago Press (1972).

Mohan, Rakesh. Development, Structural Change and Urbanization: Explora-tions within Dynamic Three-Sector General Equilibrium Model Appliedto India, Princeton University: Unpublished Ph.D. Dissertation (1977).

. "Contribution of Research and Extension to Productivity

Change in Indian Agriculture", Economic and Political Weekly,Vol. 9 (September 28, 1974) A-97-104.

Mukherjee, M. National Income of India: Trends and Structure, Calcutta.Statistical Publishing House (1969).

National Council for Applied Economic Research. Savings in India, NewDelhi, India (1965).

National Council for Applied Economic Research. All India ConsumerExpenditure Survey, Vol. II, New Delhi, India (1967).

Panikar, P.G.K. Rural Savings in India, Bombay 1970.

Price, Derek de Solla. Science Since Babylon, New Haven: Yale UniversityPress (1975).

Robinson, E.A.G. Problems in Economic Development, New York, St. Martin'sPress (1965).

Sovani, N.V. "The Analysis of Overurbanization", Economic Developmentand Cultural Change, Vol. 12 (January 1962), pp. 216-222.

Yamaguchi, Mitoshi. Technical Change and Population Growth in the EconomicDevelopment of Japan, University of Minnesota: Unpublished Ph.D.Dissertation (1973).

W rlId Bank Oxford University Press, 1981. 192 ing maps, appendixes, bibliography,World Bank pages (including index, appendixes). index).

Puiblications LC 81-3999. ISBN 0-19-520264-3, LC 80-8023. ISBN 0-8018-2499-0,$16.95 hardcover, ISBN 0-19-520265-1, $32.50 (S20.75) hardcover;of Related $7.95 paperback. ISBN 0-8018-2498-2, $9.50 (f6.75)

Interest Also available In Korean from the paperback.Korea Research Institute for HumanSettlements. Costs aind Scale of

Bus ServicesThe Transformation of A. A. WailtersUrban Shelter: Upgrading World Bank Staff Working Paper No.the Housing Stock in 325. April 1.979. iv + 49 pagesCartagena, Colombia (including 3 annexes, references).W. Paul Strassmann Stock No. WP-0325. $3.00.

In urban development It is nowoften considered more practical and Economic Forces Underly-

CiisinteDveoigefficient to upgrade the existing Ing Urban DecentralizationCites in the Develop ing housing stock than to replace it withWowrld: Policies for Their new construction. Housing transfor- Trends: A Structural ModelEquiitable and Efficient mation should not only be expected for Density GradientsGrowth and tolerated, but should even be Applied to KoreaJohannes F Linn fostered as a means to increase J. R. Follain, Bertrand Renaud,

production in an important feld, to and Gill-Chin LimDelineates the major policy issues generate employment and tothat arise in the efforts to adapt to improve equity in the distribution of World Bank Reprint Series: Numberthe growth of cities in developing housing. This study shows how the 107. Reprinted from Environment andcouritries and discusses policies housing stock in Cartagena was Planning A 11 (1979):541-551.designed to increase the efficiency upgraded during the 1970s byand equity of urban development. owner-occupants and, to a lesser Stock No. RP-0107. Free of charge.Particular areas covered include extent by landlords. The principalurban employment income conclusions are supported by exten- Housingredis;tribution through the fiscal sive econometric tests and bysystem, transport, housing, and interviews with local experts and Reviews the importance of housingsocial services. The policy instru- authorities dvthin the framework of urbanments considered include public development problems, and makesinve ;tment pricing, taxation, The Johns Hopkins University Press, recommendations for World Bankand regulation. May 1982. About 224 pages. assistance in integrated urban

Oxfo,-d University Press, June 1982. LC 81-48176. ISBN 0-8018-2805-8, planning.About 352 pages (including bibliog- $22.50 hardcover. Sector Policy Paper. May 1975.raphy. index). 75 pages (including 13 annexes).ISBN 0-19-520382-8, $27.50 hardcover; Urban and Spatial English, French, Spanish, and Arabic.ISBN 0-19-520383-6, $12.50 paper- Development in Mexico Stock Nos. PP-7506-E, PP-7506-F,back. Ian Scott PP-7506-S, PP-7506-A. $5.00.

Examines urbanization in a countryin which that process has been llousing; for Low-Income

National Urbanization Policy particularly rapid and in which such Urban Famiies: EconomicsIn lieveloping Countries issues as provision of Jobs, shelter,Bertrand M. Renaud public services, and mass transit are and Policy in the

urgent. Also considers issues that Developing WorldNatic nal urbanization policies In arise because of the size and form of Orville E Grimes, Jr.deve loping countries often attempt the system of large cities and thewithoiut a full understanding of the linkages between them: centraliza- Analyzes thte operation of urbanforces at work to block the growth of tion, rural-urban Integration, and pat- housing markets in developing coun-

thelirgst itesand to induce trsoIteegoadvlpmnt, tries to determine the kinds of dwell-the rgest cities anomuceterns of Interregional toeopme ings affordable by the urban poor.deceritralization. This book takes a The study is relevant to other coun-critical look at such policies and their tries in which similar problems will The Johns Hopkins University Press,weak conceptual foundations and undoubtedly become increasingly 1976. 190 pages (including statisticaldesciibes problems inherent in urgent. appendix, select bibliography, Index).Implementation. The coverage Iscomlprehensive, and both global and The Johns Hopkins University Press, LC 76-4934. ISBN 0-8018-1853-2,national trends are analyzed. April 1982. About 320 pages (Includ- $18.50 (.£950) hardcover;

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The Economics of Road Reappraisal of a RoadUser Charges Project in IranA. A. Walters Herman G. van der Tak andMarginal cost pricing and consumer Jan de Weillesurplus criteria for investment The Johns Hopkins University Press,

decisions. ~~~~~1969. 142 pages (includingThe Johns Hopkins University Press, 2 annexes).1968; 3rd printing, 1978. LC 68-57489. ISBN 0-8018-1030-2,xiii + 243 pages. $5.00 (f.3.00) paperback.LC 68-8702. ISBN 0-8018-0653-4,$7.50 (&4.50) paperback. Road User Charges in

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Engineering Economics of The Johns Hopkins University Press,the Maintenance of Earth 1972. 188 pages (including

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Examines the road maintenance World Bank Reprint Series: Number Sector and Project Planningproblem in developing countries and 120. Reprinted from Transportation in Transportationdescribes the Bank's experience in Research Record 702 (August Hans A. Adlerthis field. 1979):260-268.

December 1981. 71 pages. Stock No. RP-0120. Free of charge. The Johns Hopkins University Press,Stock No. PP-8102. $5.00. 1967; 3rd printing, 1973. 88 pages(including annex, bibliography).

LC 67-28574. ISBN 0-8018-0009-9,Book Review of "Advances Identiflcation and Appraisal $5.00 (£3.00) paperback.in Maritime Economics' of Rural Roads ProjectsA. A. Walters Henri L. Beenhakker and Urban TransportWorld Bank Reprint Series: Number Abderraouf Chammari Attempts to analyze the long-term110. Reprinted from Journal of Political World Bank Staff Working Paper No. implications of alternative urbanEconomy 87 (June 1979):656-659. 362. October 1979. 74 pages (includ- in the context eogfies alnd investments

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