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o _ ~ Will slower population growthfacilitateth~ absorption of workers into the modern economic sector and alleviate problems of urban growth? THE RELATIONSHIP BETWEEN ECONOMIC DEVELOPMENT AND CITIES The impact of rapid population growth on the share of the labor force employed in the modern economic sectors of the developing countries and the problems of congestion, slums, and inadequate public services associated with the rapid growth of cities in developing countries are not readily distinguished. Urban labor markets and city growth interact with one another and with other markets and are affected by public policy so that the overall role of population growth cannot be easily determined. In considering the effect of population grown on labor markets and urban conditions in developing countries, one might define the overall development process in terms of three related processes. Perhaps most fundamental is Be structural transformation of economic activity from agriculture or other primary production to industry and modern services, including those provided by the government sector. Because the modern economic sectors are characterized by higher wages, this shift contributes to per capita income growth, the second main feature of development. Finally, both rising income levels and increased public expenditures contribute to access to modern education and improved heals care, the third main feature of development. Cities play an important role in all three aspects of Be development process. Both industrialization and the provision of public service infrastructure in developing countries have been largely concentrated in major cities, in part reflecting the economies of scale made possible by urban agglomeration. 66

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URBAN GROWTH 67 The expansion of relatively high-wage modern sector employment and better access to health and educational facilities has attracted rural migrants to cities. While urban-based development provides benefits otherwise unavailable to many people in developing countries, there are also significant costs. Accelerating city growth has strained the capacity of the modern sector to absorb new workers and increased the number of urban poor, contributing to the slums and urban squalor that are among the most visible problems associated with poverty. POPULATION GROWTH, CITY GROWTH, AND URBANIZATION Because of their different relationship to the development process, city growth rates and increases in urbanization must be carefully distinguished. City growth rates are the percentage change in the absolute number of people living in a given city or group of cities; increases in urbanization refer to a growing proportion of a national population living in urban areas. It is also useful to differentiate between urbanization patterns exhibiting a high degree of primacy, in which a large proportion of all urban residents live in the largest city, and more diffuse patterns. An empirical distinction between increasing urbanization and city growth is provided by a comparison of the experiences of developing countries between 1950 and 1975 win that of the now-developed countries between 1875 and 1900. Preston (1979:196) observes that the increase in urbanization for developing countries from 16.7 to 28.0 percent during the recent period is quite similar to the increase from 17.0 to 26.1 percent for the earlier 95- year period. In contrast, cities in developing countries grew at a 4.3 percent annual rate between 1950 and 1975, nearly tripling the* urban populations (United Nations, 1980:Table 4) and far exceeding the 2.8 percent average growth rate of cities in the now-developed countries during Be late nineteenth century (United Nations, 1980:Table 3~. This city growth directly reflects population growth rates of 2.3 percent annually for developing countries over the period (Bureau of the Census, 1983:Table 8), more than double the 1.1 percent rate estimated for the developed countries in the earlier period (United Nations, 1980:Table 4~. Indeed, roughly 60 percent of the growth of cities in developing countries between 1960 and 1970 can be attributed to natural increase (United Nations, 1980:Table 11), and the rate of national population grown appears to be the single most significant determinant of city growth rates. Controlling for other factors, a 1 percent increase in a national population grown rate generates roughly a 1 percent increase in the growth rate of the cities in a country (United Nations, 1980:Table 19), while national political capitals tend to

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68 POPUl~lON GROWTH AND ECONOMIC DEVELOPMENT grow more rapidly than do other cities. Higher city grown rates are also associated with more rapid increases in per capita GNP. The importance of national population grown as a determinant of city growth reflects the fact that broad cultural, social, and economic factors tend to determine fertility and mortality within both rural and urban areas in a country. The relatively young age of mral migrants to cities means a greater contribution to natural increase through more births and fewer deaths. This effect tends to offset the declines in fertility rates typically associated with urban residence (Stolnitz, 1984), so that urban rates of natural increase (the difference between birth and death rates) approximate national rates. In contrast to the relationships between city growth and overall population growth, cross-national studies consistently suggest that urbanization is primarily related to He level of economic development as measured by per capita income or GNP (Chenery and Syrquin, 1975:Table 7~. On the basis of recent data, Montgomery (1985) finds urbanization to be much more strongly associated with per capita income than with population growth. The principal demographic source of increasing urbanization is rural-urban migration. Although rapid population growth was once thought to be an important cause of rural-urban migration, with rural poverty due to excess labor supply providing a"push" to the cities (e.g., Lewis, 1954), rural outmigration now seems to be less strongly associated with rural population increase than with changes in agricultural productivity and rates of overall economic growth (United Nations, 1980:Table 13) and to be related to land tenure systems win marked inequality in land holdings and landlessness (Standing, 1984~. In fact, Preston (1979) argues that poverty tends to preclude migration, which requires resources, while increasing agricultural productivity generates rural income growth and the means to move. At the same time, expanding industrial output and employment provides an economic "pull" to major cities. This pattern is broadly consistent with the historical experience of the now~eveloped countries, where the large-scale migration from rural areas to cities occurred in the context of rapid industrial expansion and agricultural productivity grown. There is strong empirical support for the notion that rural-urban migration in developing countries is motivated primarily by economic opportunity in cities, including both higher wages and access to public services and educational facilities (Greenwood, 1969, 1971, 1978; Schultz, 1971; Yap, 1977; Todaro, 1980; Rempel, 1981; Mazumdar, 1985~. Recent simulation studies using models of urbanization by Kelley and Williamson (1984) and Mnhan ( 19841 incorporate linkages between structural economic change, ~ ~ - - ~ a ~ ~ ~ _ ~ ~ ~ A^- ~ ~ ; ~ ~ technological growth, and m~gral~on. Anew; Swung it,. Slim act, urbanization in developing counties reflects the growth of industry and modern sector services, while population growth has only a small effect.

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URB~ GROW 69 In summary, the evidence seems to indicate that the rapid growth of cities in developing countries compared with historical patterns results primarily from high national rates of population increase, while increases in urbanization, which have been roughly comparable with historical experience, are due almost entirely to rural-urban migration in response to economic grown and access to publicly provided services. URBANIZATION AND ECONOMIC GROWTH Urban areas play a strategic role in development. To make He best use of scarce public sector resources by exploiting economies of scale, facilities for power generation and water treatment, transportation systems, and other public infrastructure tend to be located in urban areas (United Nations, 1980:39~. Access to urban infrastructure confers a cost advantage to industrial firms locating in those areas, as do the economies of scale associated with access to larger and more diversified markets for labor and other input factors, although these economies of scale seem to be attributable more to the clustering of similar industries than to urban size itself (Henderson, 1985~. As industrial output increases, so does the share of relatively high-wage industrial employment. Saving tends to increase as a result of the consequent improvement in average income, providing funds for investment in industrial capital, education (Chenery and Syrquin, 1975:23), and housing stock, the latter representing about 20 percent of all fixed investment and 37 percent of construction in developing countries (Linn, 1983:Table 5-3~. As incomes increase, the composition of domestic demand tends to shift from food to nonfood goods, including modern health care and housing services, as well as to manufactured goods, Her stimulating modem sector growth (Chene~y and Syrquin, 1975:32~. With continued changes in the composition of output and consumption, the agricultural share of employment declines, and the share of industry and services increases (Chenery and Syrquin, 1975:48~. Migration in search of higher wages continues in response to expanding modern sector employment, accompanied by increasing urban population densities. In turn, the price of urban land rises Engram, 1980), driving up the cost of housing, transported food, and other urban living expenses. This narrows the real rural-urban wage gap, slowing migration and the pace of urbanization (Kelley and Williamson, 1984~. As development prods, modern sector economic activity diversifies, and the urban sector diffuses into an integrated system of cities, each tending toward specialization in some set of economic activities (Henderson, 1984, 1985~. In this highly stylized description, urbanization contributes to overall development by attracting human resources to activities with greater economic returns. The movement

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70. POPUl=ION GROWTH AND ECONOMIC DEVELOPMENT of labor from relatively low-wage rural activity to h~gher-wage industrial and modem service sectors contributes to higher overall average income levels, further stimulating economic growth. Although contemporary urbanization rates in developing countries are comparable with those in the now-developed countries at the end of the nineteenth century, the proportion of the nonagricultural labor force engaged in manufacturing is significantly lower in today's developing countries than in the* historical counterparts-approximately 40 percent in 1981 (World Bank, 1983b:148) compared with 55 percent in 1900 (Squire, 1981:Table 1~. This difference raises the question of whether developing countries have been less successful in absorbing labor supply growth into the modem sector. One reason cited for the lower proportion of industrial employment in developing countries relative to the comparable period in the history of the now-developed countries is the labor-saving bias in the former, in spite of abundant labor (Todaro and Stilkind, 1981~. Indeed, industrial labor productivity in the developing countries grew at an annual rate of 4.6 percent in the 1960s, compared with a 2.0 percent rate for the relevant countries during the last 20 years of the nineteenth century. This productivity difference reflects We predominance of technology imported or copied from developed countries (James, 1985) and seems to be especially prominent in counties emphasizing domestically manufactured import substitutes, which apparently require more capital-intensive methods Man does export-oriented manufacturing Krueger, 1978). The relationship between productivity growth and labor absorption in industry is not simply technological. In developing countries, high-quality goods for high-income domestic consumers, for export markets, or as inputs to the* growing modern sectors may entail relatively capital-intensive production processes. Expanding industrial output to meet demand in these markets might increase employment enough to offset any decreases in unit labor requirements due to productivity gains (Squire, 1981:29~. Moreover, the direct effect of labor-saving technology on industrial employment growth is partly offset by the indirect effect on employment grown in supply sectors when interindustry linkages are taken into account, an effect Mat tends to be larger as the economy-wide level of technology increases (Stem and Lewis, 1980~. Thus, Mohan (1984) suggests that a shift to more labor-intensive production might increase modern sector labor absorption, but the quantitative impact probably would not be large. Perhaps more relevant to the seemingly slow absorption of labw into industry in Me developing countries relative to the history of the last century is the emergence of large government sectors throughout Me world in the twentieth century. Publicly provided goods and services are very important in Me developing counties, comprising 26.2 percent of gross domestic product

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URBAN GRO~IW 71 (GDP) expenditures in 1981, even more than the current 21.7 percent for developed countries (World Bank, 1983a:Table 3~. Although the service sector typically exhibits lower wage levels than the industrial sector (Squire, 1981:Table 15), so that the shift from agriculture into services rather than into manufacturing slows the growth in average urban income, public sector wages are generally high in developing countries (Squire, 1981:118~. On the whole, the share of service employment is consistent with the increasing importance of He service sector in all economies. For example, in the developed countries, industrial workers accounted for only about 40.2 percent of nonagricultural employment in 1981 (World Banlc, 1983b:148), roughly the same as the developing countries. The broad patterns of structural change that characterize the development process are closely related to increasing urbanization. The evidence suggests that, on average, the composition of the urban-based labor force in developing countries is comparable to that of contemporary developed countries, even though the adoption of high-productivity technology may have resulted in a smaller share for industrial employment than historically in the now-developed countries. Moreover, that technology has made possible rapid GOP growth and relatively high industrial wages, generating He tax revenues necessary to expand public services (Chenery and Syrquin, 1975:Tables 4,5,6~. RAPID POPULATION GROWTH AND LABOR MARKETS A widely noted characteristic of urban labor markets in developing countries is some~degree of segmentation. The modern sector generally consists of physical and human capital-intensive industrial and service activities and pays relatively high wages, while the 'informal" sector consists of labor- intensive small manufacturing or service businesses and self-employed workers, typically requiring fewer skills and paying relatively low wages. According to Squire (1981:79) a key distinction between the sectors is that the rate of return to labor in informal activities is determined primarily by supply and demand conditions, whereas market imperfections tend to limit modem sector wage flexibility, generating unemployment and supply spillovers to the informal sector. Perhaps because of these rigidities, rapid population growth is associated in cross-national results with a slower absorption of the labor force into industrial and modern sector activities (Oberai, 1978; Squire, 1981:183; Chenery and Syrquin, 1975:48~. Squire (1981:109) cites several possible sources of labor market imper- fections in the modern sector, including wage inflexibility in government employment and in large-scale production liens, especially those under foreign control, and a tendency for wage patterns established in Hose segments of the economy to diffuse throughout the modern sector. He suggests, however,

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72 POP UNION GROWTH ANT) ECONOMIC DEVELOPMENT that minimum wage legislation and unions generally tend to exert less impact in developing countries than in developed countries because of the* limited scope, although their influence vanes across countnes. Mazumdar (1984, 1985) notes that large-scale production firms may be motivated to pay a wage premium to encourage worker productivity and ensure stability, given the relative scarcity of skilled workers and the costs of training. Another imperfection is discrimination based on race, ethnicity, and sex, which may also restrict access to high-wage employment (Knight and Sabot, 1982~. But while Were is evidence of market imperfections, it would be a mistake to conclude mat supply factors have no impact on modern sector wage levels. Indeed, there is evidence that, as theory would predict, rapid labor supply increases result in slower wage grown in manufacturing and in other nonmanufacturing modern sector activities (Squire, 1981:Table 163. Given an urban labor market segmented into relatively high- and low-wage sectors, it may be economically rational for job seekers to accept a period of unemployment while searching for a high-wage job rawer than work in the low-wage sector Modal, 1969; Hams and Todaro, 1970; Fields, 1975; lIarTis and Sabot, 19821. Reflecting the relatively rapid expansion of education in developing countries (Squire, 1981:130), open unemployment seems to be highest among young, relatively well educated labor market entrants whose search for modern sector employment is financed by nonlabor income, typically transfers from family members (Squire, 1981:3~. Although data limitations mike it difficult to assess Me scope of open unemployment, the evidence available suggests that rapid labor force growth in developing countries has not been accompanied by systematic increases in joblessness (Sabolo, 1975; Gregory, 19803. In contrast to relatively well-off job seekers able to afford unemployment during a search for modern sector employment, most low-skilled urban workers are obliged to accept employment in Me informal sector (Linn, 1983:37~. Since some employment in this sector represents spillover from modem sector labor markets unable to absorb growth in the urban labor force, it has been characterized as underemployment or disguised unemployment (e.g. International Labour Organisation, 1974~. These teens seem to suggest that informal sector activity contributes little to the development process, but there is evidence that many of these activities play useful intermediary roles in modem sector production and distribution (Linn, 1983:40; Montgomery, 1985~. Portes and Benton (1984) argue that contractually hired labor raises labor costs and reduces flexibility, so Mat direct hiring of casual labor or subcontracting to small informal sector businesses may represent an efficient strategy for modern sector firms in construction, light manufacturing, and commercial distribution. While average wages tend to be lower in Me informal sector, entrepreneurs may earn incomes comparable to modern sector workers

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URBAN GROWTH 73 (Squire, 1981:1403, and low wages for less expenenced workers may be offset by skill acquisition and eventual accession to self-employment (Montgomery, 1985~. In this sense, the interpenetration of informal and modern sector activities may represent a relatively efficient adaptation to institutional factors, contributing to overall employment and economic growth. At the same time, We relatively free play of supply and demand that characterizes informal sector labor markets means that labor force growth influences wage levels. Because informal sector output is generally not traded internationally, paces of output tend to decline with increases in supply (Squire, 1981:135), so that rapid labor force growth in this sector tends to depress the wages and incomes of people employed in those activities. Indeed, Portes and Benton (1984:589) emphasize that low wages in the informal sector are the prime cause of the income inequality and poverty of urban populations in developing countries. Even though rapid labor force grown typically results in lower wages than would otherwise prevail in urban labor markets, both in the modem and informal sectors, it is important to note that most urban workers are probably at least as well off as they might be in rural areas. Recent research suggests that migrants to cities are often able to increase their incomes relative to rural levels and, over time, achieve earnings comparable to those of nonmigrant urban residents (Yap, 1977; Squire, 1981:103; Rempel, 1981:93~; however, n~ral-urban living cost differences make comparisons difficult. Of course, die population movement may partly reflect a greater tendency to migrate among those with education or skills most suited to urban job maricets or with prior access to job contacts through ldnship or village networks (Mazumdar, 1985~. Although the return of unsuccessfi~1 migrants to rural areas may upwardly bias estimates of the economic returns to migration, Montgomery (1985) concludes Hat most urban migrants gain economically from their move. TlIE EFFECT ON LABOR ABSORPTION OF DISTORTIONS IN OTHER MARKETS In major urban areas, direct subsidies for food, along win the subsidized provision of infrastructure and health and education services at prices that do not reflect Heir costs to He public sector, artificially lower living costs. By increasing real rural-urban wage differentials beyond what results from differences in sectoral labor productivity, these subsidies increase migration to cities (Squire, 1981:107~. If, as a result, urban labor supply increases more rapidly Han modern sector labor demand, unemployment and spillovers to the informal sector may result. Excessively subsidized and inappropriate services may be particularly pronounced in a country's political capital,

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74 POPULATION GROWTH ANN ECONOMIC DEVELOPMENT which is often its largest city (Gilbert, 1976). These distortions would be expected to increase the attractiveness of these cities to migrants, and, in fact, migration seems to be disproportionately important in We grown of this class of cities (United Nations, 1985~. Ceilings on interest rates in developing countries tend to ration credit so that it is available only to a few favored firms, limiting investment that would expand the size of the modern sector. In addition, credit rationing tends to rule out investment by smaller, more labor-intensive enterprises, which would tend to increase informal sector wages (Squire, 1981:166~. Trade policies, including exchange-rate distortions and systems of taxes, subsidies, and quotas favoring some industrial sectors, may have an impact on labor absorption. For example, Chenery and Syrquin (1975:64,116) distinguish two basic trade strategies: import substitution and export-oriented manufacturing. Large developing countries with significant primary resources have typically followed the former strategy, using overvalued exchange rates and taxes on primary exports to subsidize imported capital goods, with quotas or protective tariffs on imported goods that are also manufactured domestically. The effect of such policies is to turn the terms of trade against agriculture, reduce rural output, and increase rural-urban wage differentials, urban migration, and the pace of urbanization (Squire, 1981:153; Todaro and StiLkind, 1981:11~. The most significant of these policies is probably exchange-rate distortions (Montgomery, 1985~. At least in partial contrast, some smaller developing countries without important primary resources have followed more e~cport-oriented trade policies that are based on foreign investment in domestic industry and undervalued exchange rates that make exports relatively inexpensive in international markets. An export-oriented trade policy seems to foster not only more rapid industrial growth (Chenery and Syrquin, 1975:42), but also somewhat more rapid grown in the high-wage industrial sector and lower overall unemployment (Squire, 1981:144~. One reason for this outcome may be that export-onented industries tend to exploit labor cost advantages by using technology more labor intensively (James, 1985~. In addition, exchange rate undervaluation tends to keep domestic agricultural prices relatively higher, reducing rural-urban wage differentials and slowing migration. URBAN GROWTH, HOUSING, AND PUBLIC SERVICES Urbanization has provided access to Be benefits of development for an increasing proportion of He population of developing countries. Linn (1983), who provides the best data available, notes that because modem sector economic activity is concentrated in cities, urban residents have access to higher-wage employment and hence enjoy higher per capita incomes (Linn,

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URBAN GROWTH 75 1983:Table 1-4) and have a lower incidence of poverty (Linn, 1983:10) than rural residents. Similarly, reflecting both urban economies of scale in the provision of public services and higher income levels, city residents have greater access to electricity (Linn, 1983:Table 1-8), to water supply and sewage removal (Linn, 1983:Table 1-9), to health services as measured directly by doctors per person (Linn, 1983:Table 1-14), to hospital beds (Linn, 1983:Table 1-15), and to education (Linn, 1983:Tables 1-17, 1-18~. However, averages do not tell the whole story. A significant proportion of the urban population lives at low income levels in squatter communities with inadequate access to public services like water, sanitation, education, and health care. Data assembled by Linn (1983:Table 1-7) suggest Mat the proportion of urban residents living in squatter settlements is rarely less than 25 percent and often more than 50 percent, and he argues that living conditions in these areas are distinctly worse than in nonsquatter areas. The importance of housing in developing countries is reflected by the large share it represents of the household budget, averaging between 15 and 25 percent of total expenditures (Linn, 1983:Table 5-2~. Housing needs include the services derived from the lot and structure, including infrastructure services such as electricity and water. But as land prices increase, both lot size and shelter space tend to decrease, and in conjunction with the large family sizes that are typical of rapidly growing populations, risk of contagious disease increases. Similarly, since squatter settlements often spread to land without public infrastructure, access to safe water and sanitary facilities is limited, also increasing the risk of disease (L;nn, 1983:194~. Because squatter settlements represent unplanned urban expansion and the provision of public transportation tends to favor authorized, primarily middle-class neighborhoods, access by the poor to health and educational facilities and to employment opportunities is limited. By constraining the ability of the poor to improve their own or their children's stock of human capital, low- quality housing in squatter settlements tends to perpetuate We cycle of urban poverty, effects that may be most severe in the most rapidly growing cities (Linn, 1983:134). Urban transportation systems, especially road networks, play an important role in economic grown by providing producers and consumers win access to markets, as well as by providing Me labor force with access to workplaces. The cost of urban transportation tends to increase with city size because of the increasing costs of land (Linn, 1983:99), so that the public provision of roads tends to lag behind urban population growth. Consequently, congestion increases, increasing trip times and transportation costs (Linn, l983:90~. This increase may disprop~onately affect informal sector activities such as small-scale wading and carnage. Moreover, as congestion increases, pollution from motorized transportation also tends to increase (Linn, 1983:98~.

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76 POPUl~lON GROWTH AND ECONOMIC DEVELOPMENT Again, not all urban problems in developing countries should be attributed to rapid population grown. Fragmented financial markets and interest-rate ceilings Cat ration credit in favor of high-income borrowers tend to limit the supply of housing, directly contributing to the grown of squatter settlements (Linn, 1983:133; Renaud, 19821. Rent control laws and inflexible zoning and subdivision regulations also tend to restrict the supply of housing, and, when nonresidential land is invaded by squatters, risk of eviction limits the quality of shelter constructed (Linn, 1983:1671. Moreover, publicly funded housing and health care projects are often modeled after relatively high- cost prototypes in developing countries, effectively baking the low-income majority from access (Linn, 1983:138~. CONCLUSIONS Lois review emphasizes the distinction between increasing urbanization and population growth to simplify the complex relationships between these demographic processes, labor markets, and the benefits and costs of large cities in developing countries. Urbanization, produced primarily by rural-urban migration, plays an important beneficial role in the development process, providing an increasing share of We population with access to relatively high-wage employment, education, heals care, and other modern public services. But rapid urbanization, resulting from both natural population increases and rural-urban migration, may cause social adjustment and congestion costs that are not fully taken into consideration by the potential migrant, and thus migration may be excessive from a social viewpoint. The most obvious and pervasive reasons for excessive urbanization, in contrast to the redeployment of labor and capital to efficient opportunities for growth in urban areas, are the many distributive effects of the public sector. Taxes, trade restrictions, and subsidies tend to favor urban residents, and the provision of health, education, and housing services are markedly skewed toward residents in urban areas in most developing countries. The documentation of the social adjustment costs imposed on economies by rapid rates of urban population grown has proved empirically difficult. Gregory (1980) could find little evidence that urban unemployment had increased in the 1970s as the postwar acceleration in population grown led to more rapid growth of me urban labor force. Nor has evidence yet been presented to show how the composition of the labor force has adapted in recent years to the presumed strains of absorbing many new urban labor force entrants. Documentation is also lacking for presumed diseconomies of scale in service provision and health conditions for very large cities. Even Cough population grown has undoubtedly exacerbated some urban

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URBAN GROWTH 77 problems, stained providers of subsidized services, and possibly slowed the growth of He share of workers who are in the modern wage sector, slower population growth will probably not, by itself, solve these problems. A first step toward slowing excessive urban growth would involve reducing the public sector's disproportionate subsidies for urban residents and urban- based economic activities.