Urbanization as a Fundamental Cause of Development

I review the current theoretical and econometric literature on the economic dynamics of urbanization and its relation to economic growth. I then report research results on the short- and long-term impacts of urbanization on human development, using Gray and Purser's 1970-2005 database on human development indicators for 111 countries. The short-term analysis is an innovative fully instrumented clustered error growth regression using both levels and changes of independent variables to predict quinquennial changes in income, health, education and urbanization. The long-term analysis is a fully instrumented quantile estimate of levels on levels of the same variables. Explanatory variables include indicators of trade, FDI, institutions and physical geography. The results show urbanization is a significant cause of growth in the short term, but with a smaller magnitude than trade, institutions and FDI flows. However, in the long-term urbanization is a stronger cause of development than trade, FDI and institutional indicators. Urbanization policies must be a centerpiece of long-term economic development policies.