How Does Urban Concentration Affect Poverty in Developing Countries?

The present paper addresses an important issue for developing countries namely the interaction between urban concentration (defined as agglomeration of population in large cities) and poverty. It provides the estimation results of a system of equations that includes poverty, urban concentration and growth as dependent and explanatory variables, distinguishes poverty in rural and urban areas and allows feedbacks. Overall, the results show that the relationship between urban concentration and poverty involves three opposite effects. This is a direct effect by which urban concentration increases poverty in both urban and rural areas. An indirect effect by which urban concentration reduces poverty in both areas: it fosters growth which translates in higher per capita income which, in turn, reduces poverty in both areas. Finally, there is a feedback effect by which higher gap between rural and urban poverty increases urban concentration. The net effect has been computed by solving the estimated system. It shows that national poverty would have been higher without urban concentration. However the marginal contribution of urban concentration is negative. The urban-rural poverty gap is lower with urban concentration but presents a U-shaped form. The reduction is higher for low levels of urban concentration and lower for high levels of urban concentration. The turning point is around 25% of urban concentration.