Urban Development and Economic Growth in Bangladesh Somik Lall The World Bank Workshop on Growth & Employment, December 12, 2005

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

Across countries, urbanization accompanies economic transformation Urban population (% of total) Source: World Development Indicators 2001

And the Importance of agriculture diminishes as countries get richer Bangladesh Source: World Bank Indicators (2000 data)

Source: United Nations World Urbanization Prospects Share of urban population is rapidly increasing In Bangladesh

Cumulative rural population by distance from different size towns Source: GIS calculations using WARPO/CEGIS data; based on 1991 census figures. Percentages are likely to be higher today as towns have increased in size and as rural areas near larger towns have grown faster than more remote areas. And much of the rural population is in close proximity to urban centers

Urbanization has been characterized by excessive concentration in a few agglomerations At the other end of the size distribution: 300 other urban areas account for only 4 percent of the urban population

Urban concentration is consistent with countries at similar income levels Dhaka accounts for 32% of urban population Concentration is important for efficiency in early stages of development There is an optimal range of concentration which varies with economic development – increases, peaks, declines

Core-periphery pattern, with Dhaka as the primary center and the port cities (Khulna and Chittagong) as secondary centers Economic activity is also concentrated around major agglomerations

Factors promoting urban concentration National political institutions : –Allocation of local public expenditures in centralized settings: national government may favor one or two cities where decision-makers live. –Favoritism involving the national government not choosing to invest sufficiently in interregional transport and telecommunications, so hinterland cities are less competitive locations; and Central government is directly responsible for urban and regional development Failures of national land development markets –With limited local fiscal autonomy, land developers and local governments cannot develop alternate locations and spread development across the urban hierarchy.

Implications of urban concentration (positives) Benefits from economies of scale and agglomeration Economic transformation with large cities leading manufacturing / industrial representation –Dhaka and Chittagong have over seven times the national representation of employment in garments and machinery. –Co-location of business and financial services boost firm level performance Thick labor markets Higher quality of life for residents as these cities can do better in proving local public goods and services

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

Microgram/m3 PM2.5Average /25/ /27/ /29/200212/31/2002 1/2/20031/4/20031/6/2003 Dhaka was ranked as one of the most polluted cities in the World, but PM2.5 concentrations have declined by 41% because of Two Stroke Phaseout

Low satisfaction with public services

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

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

How do we improve the contribution of the urbanization process to economic growth? Improving management of the largest agglomerations Dhaka (and other major cities) will continue to attract rapid population growth unless other urban centers become viable investment decisions. Performance of major agglomerations need to be enhanced –Institutional reform –Provision of serviced land –Enhancement of own source revenues Investments in inter regional infrastructure to de- concentrate standardized manufacturing

How do we improve the contribution of the urbanization process to economic growth? Developing alternate locations Enhance the ability of Pourashavas to provide local services that are valued by local resident (but how?) BMDF may be a useful vehicle for local infrastructure improvements There may however be adverse welfare consequences if resources are spread too thinly or large cities are starved in order to stimulate smaller centers