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Urban Growth, Uninsured Risk, and the Rural Origins of Aggregate Volatility

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Author Info
Steven Poelhekke

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Abstract

The level of urbanization has increased by over 5 percentage points per decade outside the developed world since 1960. Rapid urbanization was accompanied by fast economic growth and job creation in most parts of the world. However, notably Africa (and Latin America after 1980) has had a different experience: while growth in GDP per capita slowed significantly or even reversed, the rate of urbanization continued its fast pace. This paper aims to explain this by introducing an aggregate risk differential between the countryside and the city. Uninsurable expected risk will lead to rural-urban migration as a form of ex-ante insurance if households are liquidity constrained in incomplete markets and cannot overcome adverse shocks. Macroeconomic volatility finds its origins in risk-prone natural resource production including agriculture and has a robust positive effect on urban growth, especially when economic growth is slow. The effect stands up to the transitional view on urbanization of economies shifting from an agricultural to an industrial base.

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Paper provided by European University Institute in its series Economics Working Papers with number ECO2008/26.

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Date of creation: 2008
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Handle: RePEc:eui:euiwps:eco2008/26

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Related research
Keywords: urbanization; risk; natural resources; volatility; rural-urban migration;

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Find related papers by JEL classification:
O1 - Economic Development, Technological Change, and Growth - - Economic Development
R11 - Urban, Rural, and Regional Economics - - General Regional Economics - - - Analysis of Growth, Development, and Changes
R23 - Urban, Rural, and Regional Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
R51 - Urban, Rural, and Regional Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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