Bi-Directory Causal Links between Urbanization and Economic Development

Linghui Fu, National Bureau of Statistics of China
Haoyi Chen, United Nations Statistics Division
Danan Gu, United Nations Population Division

This study aims to empirically investigate the causal links between urbanization and economic development for 79 countries with a completed time series dataset on economic development and urbanization from 1961-2010 based on a simultaneous equations model. Our results demonstrate a bi-directory causal link between urbanization (indexed by urban proportion and urban primacy) and the level of economic development (measured by GDP per capita), depending on the economic development status of a nation. Specifically, when the economic development level is low, there is some evidence to show a positive bi-causal link between economic development and urbanization. By contrast, an insignificant or negative bi-causal link is found at the advanced stage of an economy. Population structure and population growth, quality of labor force, and GDP shares by fixed capital formation, international trade and industrial structure are also major factors influencing both economic development and urbanization.