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What drives third world city growth
398
Book reviews
Allen C. Kelley and Jeffrey G. Williamson, What Drives Third World City Growth (Princeton University Press, 1984) pp. 256, $22.00 in cloth, $14.50 paperback. Kelley and Williamson give us a computable general-equilibrium model of the economic development process. It is much more, and at the same time, a bit less, than an analysis of 'What Drives Third World City Growth'. It is apparent that the interesting processes of urbanization, industrialization, and the demographic transition are determined by forces well beyond these sectors. Yet partial-equilibrium, or worse, projection, analyses of these phenomena totally miss these interconnections. With general equilibrium analysis, we have more reason to hope that a prediction about one sector does not hinge on something preposterous happening in another sector. Kelley and Williamson take great care both in construction of the individual sectors and in forging the accounting and equilibrium links among sectors. As a typical example of their elegance, one should look at the characterization of saving and investment beginning on p. 56. The model goes well beyond the standard capital market, emphasizing the lack of intermediation for some types of investment (in particular, squatter housing). Funds saved by individual sectors are frequently earmarked for specific uses, and are made available for financing other investments only after the earmarked demands have been satisfied. (Mainly to satisfy my curiosity, I would have liked to see a counterfactual simulation in which these capitalmarket imperfections were eliminated. Would improvements in the intermediation process have substantial effects on the development process?) The most striking result to emerge from this work is an unequivocal statement as to the primary causes driving third-world development and urbanization during the period ending in 1973. This period's rapid pace of urbanization and development was driven by improvements in developing countries' ability to sell manufactured goods on the world market. In particular, technological progress was more rapid in manufacturing than in agriculture. Indeed, had the world price of manufactured goods not fallen during the pre-OPEC era, urbanization would have been considerably faster than it actually was. The standard 'culprits' - cheap energy, overall population growth, and rural land scarcity - played relatively minor roles, according to the Kelley-Williamson simulations. When seen in this light, the rapid pace of urbanization is not a symptom of a disease, but rather an indication of a healthy response to an opportunity. The credibility of these striking findings rests in large measure on the plausibility of the assumptions underlying the model itself. This is unfortunate (but unavoidable). In a complicated general equilibrium model such as this one, it is virtually impossible for the reader (or the authors, I would venture) to form a good sense of both the plausibility and importance of all
Book reoiews
399
assumptions. But when we simplify to partial equilibrium, we are buying transparency at the cost of reduced realism. I am convinced that the model cannot reasonably be simplified and still perform the task at hand. Furthermore, I see no obvious empirical tests. Our only hope for validation is careful examination of the model itself. To this end I offer a few observations of the 'urban' part of the model In Kelley-Williamson, the stock of urban land is fixed, and apparently there is but one city. Given their sensible characterization of the law" of diminishing returns, this urban land constraint produces progressively more congestion as urbanization proceeds. This congestion is the primary check on urbanization. But in reality, rural land is converted to urban in response to market or quasi-market forces. In addition, if the congestion inherent in big cities impedes further urbanization, we could anticipate that urban growth could be redirected to other smaller cities. Whereas it is plausible to assume that congestion and other externalities inhibit growth of individual large cities, in my view it is implausible to assume that congestion slows the pace of an entire nation's urbanization. Since I do not believe that congestion and urban land scarcity played the role assigned to it in Kelley-Williamson, I am forced to conclude that something else - something which must be outside their model - exercised a restraining influence on pre-OPEC urbanization. I doubt our ability to find this hidden agent until the Kelley-Williamson model is upgraded to encompass a more realistic characterization of the urban land market. (Interestingly, the authors never run a 'counterfactuar simulation in which the stock of urban land grows, even at an exogenous rate. I would guess that modelling even a modest growth rate of urban land would lead to a rather large increase in the pace of urbanization.) Though I am sure my suggestion is at or beyond the margin of feasibility, I would like to see the authors' segmented land market replaced with an integrated land market similar to the one they discuss but reject. If they retain their one-city assumption, the integrated land market will certainly generate a secular rise in the ratio of urban to rural land value (only at the boundary do the two types of land command the same price). But as I noted, even the integrated land market fails to capture all of the flexibility of the true system. Rising land rents can be mitigated by diverting growth to smaller cities. (Of course, diverting growth to smaller cities carries a cost as well as a benefit, assuming cities exist to exploit some scale or agglomerative economies.) In order to fully characterize the role of congestion in limiting the pace of urbanization, we need a characterization of the urbanization process in which the conversion of rural to urban land is endogenous, and in which the size distribution of cities is determined - at least at the margin - by economic forces. This is a tall order. But Kelley and Williamson have already delivered on a tall order. So perhaps progress will be made along these lines. My hope for
400
Book reviews
more progress in no way diminishes my admiration for the pioneering work which Kelley and Williamson have given us. This book is clearly the foundation upon which a vast body of future development work will rest. I wish to make one final comment regarding the role of population growth. Kelley and Williamson give us strong reasons to believe that rapid population growth was a relatively minor contributor to the rapid pace of urbanization in pre-OPEC developing countries. Upon reading this book, it is easy to jump on the 'let's-not-worry-about-population-growth' bandwagon. But in fact the book is almost silent on the important question of the relationship between population growth and economic welfare. For example, does population growth divert savings from output-enhancing investments toward housing and social overhead capital? What are the long-run implications of population growth? The longer population grows rapidly, the longer will cities grow rapidly. Perhaps the Kelley-Williamson framework will ultimately be turned to these questions. Bruce W. Hamilton The Johns Hopkins University, Baltimore, MD
Pasquale Scandizzo, Peter Hazell and Jock Anderson, Risky Agricultural Markets: Price Forecasting and the Need for Intervention Policies (Westview Press, Boulder, 1984) pp. xii + 142, $14.95. This is a nice little book - part survey, part reporting of original research, and part highlighting of areas for further research. It is not a substitute for the detailed analysis in D.M.G. Newbery and J.E. Stiglitz, The Theory of Commodity Price Stabilization (Oxford University Press, 1981). For one thing the Newbery-Stiglitz volume covers many topics not touched on in this book. However, as a quick introduction to the basic issues it is to be recommended, and for some topics such as the use of mathematical programming models, it is the only one of the two that provides coverage. The book consists of seven chapters. After a brief introduction, Chapter 2 starts the substantive analysis with a partial equilibrium account of a single market. The focus is on producers' expectations and their realization. The analysis and exposition are simplified by using the 'multiplicatively separable error' formulation. This same formulation helps maintain tractability in the later sections of the chapter, when a two-sector general equilibrium model is considered. Chapter 3 moves on to agricultural supply functions under risk. A good review of the theoretical literature is presented, as well as some illustrative empirical work. The latter includes both standard econometric exercises
Book reviews
Allen C. Kelley and Jeffrey G. Williamson, What Drives Third World City Growth (Princeton University Press, 1984) pp. 256, $22.00 in cloth, $14.50 paperback. Kelley and Williamson give us a computable general-equilibrium model of the economic development process. It is much more, and at the same time, a bit less, than an analysis of 'What Drives Third World City Growth'. It is apparent that the interesting processes of urbanization, industrialization, and the demographic transition are determined by forces well beyond these sectors. Yet partial-equilibrium, or worse, projection, analyses of these phenomena totally miss these interconnections. With general equilibrium analysis, we have more reason to hope that a prediction about one sector does not hinge on something preposterous happening in another sector. Kelley and Williamson take great care both in construction of the individual sectors and in forging the accounting and equilibrium links among sectors. As a typical example of their elegance, one should look at the characterization of saving and investment beginning on p. 56. The model goes well beyond the standard capital market, emphasizing the lack of intermediation for some types of investment (in particular, squatter housing). Funds saved by individual sectors are frequently earmarked for specific uses, and are made available for financing other investments only after the earmarked demands have been satisfied. (Mainly to satisfy my curiosity, I would have liked to see a counterfactual simulation in which these capitalmarket imperfections were eliminated. Would improvements in the intermediation process have substantial effects on the development process?) The most striking result to emerge from this work is an unequivocal statement as to the primary causes driving third-world development and urbanization during the period ending in 1973. This period's rapid pace of urbanization and development was driven by improvements in developing countries' ability to sell manufactured goods on the world market. In particular, technological progress was more rapid in manufacturing than in agriculture. Indeed, had the world price of manufactured goods not fallen during the pre-OPEC era, urbanization would have been considerably faster than it actually was. The standard 'culprits' - cheap energy, overall population growth, and rural land scarcity - played relatively minor roles, according to the Kelley-Williamson simulations. When seen in this light, the rapid pace of urbanization is not a symptom of a disease, but rather an indication of a healthy response to an opportunity. The credibility of these striking findings rests in large measure on the plausibility of the assumptions underlying the model itself. This is unfortunate (but unavoidable). In a complicated general equilibrium model such as this one, it is virtually impossible for the reader (or the authors, I would venture) to form a good sense of both the plausibility and importance of all
Book reoiews
399
assumptions. But when we simplify to partial equilibrium, we are buying transparency at the cost of reduced realism. I am convinced that the model cannot reasonably be simplified and still perform the task at hand. Furthermore, I see no obvious empirical tests. Our only hope for validation is careful examination of the model itself. To this end I offer a few observations of the 'urban' part of the model In Kelley-Williamson, the stock of urban land is fixed, and apparently there is but one city. Given their sensible characterization of the law" of diminishing returns, this urban land constraint produces progressively more congestion as urbanization proceeds. This congestion is the primary check on urbanization. But in reality, rural land is converted to urban in response to market or quasi-market forces. In addition, if the congestion inherent in big cities impedes further urbanization, we could anticipate that urban growth could be redirected to other smaller cities. Whereas it is plausible to assume that congestion and other externalities inhibit growth of individual large cities, in my view it is implausible to assume that congestion slows the pace of an entire nation's urbanization. Since I do not believe that congestion and urban land scarcity played the role assigned to it in Kelley-Williamson, I am forced to conclude that something else - something which must be outside their model - exercised a restraining influence on pre-OPEC urbanization. I doubt our ability to find this hidden agent until the Kelley-Williamson model is upgraded to encompass a more realistic characterization of the urban land market. (Interestingly, the authors never run a 'counterfactuar simulation in which the stock of urban land grows, even at an exogenous rate. I would guess that modelling even a modest growth rate of urban land would lead to a rather large increase in the pace of urbanization.) Though I am sure my suggestion is at or beyond the margin of feasibility, I would like to see the authors' segmented land market replaced with an integrated land market similar to the one they discuss but reject. If they retain their one-city assumption, the integrated land market will certainly generate a secular rise in the ratio of urban to rural land value (only at the boundary do the two types of land command the same price). But as I noted, even the integrated land market fails to capture all of the flexibility of the true system. Rising land rents can be mitigated by diverting growth to smaller cities. (Of course, diverting growth to smaller cities carries a cost as well as a benefit, assuming cities exist to exploit some scale or agglomerative economies.) In order to fully characterize the role of congestion in limiting the pace of urbanization, we need a characterization of the urbanization process in which the conversion of rural to urban land is endogenous, and in which the size distribution of cities is determined - at least at the margin - by economic forces. This is a tall order. But Kelley and Williamson have already delivered on a tall order. So perhaps progress will be made along these lines. My hope for
400
Book reviews
more progress in no way diminishes my admiration for the pioneering work which Kelley and Williamson have given us. This book is clearly the foundation upon which a vast body of future development work will rest. I wish to make one final comment regarding the role of population growth. Kelley and Williamson give us strong reasons to believe that rapid population growth was a relatively minor contributor to the rapid pace of urbanization in pre-OPEC developing countries. Upon reading this book, it is easy to jump on the 'let's-not-worry-about-population-growth' bandwagon. But in fact the book is almost silent on the important question of the relationship between population growth and economic welfare. For example, does population growth divert savings from output-enhancing investments toward housing and social overhead capital? What are the long-run implications of population growth? The longer population grows rapidly, the longer will cities grow rapidly. Perhaps the Kelley-Williamson framework will ultimately be turned to these questions. Bruce W. Hamilton The Johns Hopkins University, Baltimore, MD
Pasquale Scandizzo, Peter Hazell and Jock Anderson, Risky Agricultural Markets: Price Forecasting and the Need for Intervention Policies (Westview Press, Boulder, 1984) pp. xii + 142, $14.95. This is a nice little book - part survey, part reporting of original research, and part highlighting of areas for further research. It is not a substitute for the detailed analysis in D.M.G. Newbery and J.E. Stiglitz, The Theory of Commodity Price Stabilization (Oxford University Press, 1981). For one thing the Newbery-Stiglitz volume covers many topics not touched on in this book. However, as a quick introduction to the basic issues it is to be recommended, and for some topics such as the use of mathematical programming models, it is the only one of the two that provides coverage. The book consists of seven chapters. After a brief introduction, Chapter 2 starts the substantive analysis with a partial equilibrium account of a single market. The focus is on producers' expectations and their realization. The analysis and exposition are simplified by using the 'multiplicatively separable error' formulation. This same formulation helps maintain tractability in the later sections of the chapter, when a two-sector general equilibrium model is considered. Chapter 3 moves on to agricultural supply functions under risk. A good review of the theoretical literature is presented, as well as some illustrative empirical work. The latter includes both standard econometric exercises