7.2 The Role of Cities
What explains the strong association between urbanization and development?
To a large degree, cities are formed because they provide cost advantages to
producers and consumers through what are called agglomeration economies.
As noted by Walter Isard, these agglomeration economies come in two forms.
Urbanization economies are effects associated with the general growth of a
concentrated geographic region. Localization economies are effects captured
by particular sectors of the economy, such as finance or automobiles, as they
grow within an area. Localization economies often take the form of backward
and forward linkages of the type introduced in Chapter 4. When transportation
costs are significant, users of the outputs of an industry may benefit from
a nearby location to save on these costs. This benefit is a type of forward linkage.
In addition, firms of the same or related industries may benefit from being
located in the same city, so they can all draw on a large pool of workers
with the specific skills used in that sector or from specialized infrastructure.
This is a type of backward linkage. Workers with specialized skills appropriate
to the industry prefer to be located there as well so that they can easily find
a new job or be in a position to take advantage of better opportunities.
Industrial Districts
An economic definition of a city is “an area with relatively high population
density that contains a set of closely related activities.” Firms often also prefer
to be located where they can learn from other firms doing similar work.
Learning takes place in both formal relationships, such as joint ventures, and
informal ones, such as from tips learned in evening social clubs or over lunch.
These spillovers are also agglomeration economies, part of the benefits of
what Alfred Marshall called “industrial districts,” and they play a big role in
Michael Porter’s “clusters” theory of competitive advantage.5 Firms located in
such industrial districts also benefit from the opportunity to contract out work
easily when an unusually large order materializes. Thus a firm of modest size does not have to turn down a big job due to lack of capacity, an arrangement
that provides “flexible specialization.”
6 Further, firms may wish to operate in
well-known districts for the marketing advantages of locating where company
procurers and household consumers of their goods know to shop to get the
best selection