Urbanisation—the shift of a population from rural areas to cities—and structural transformation—the shift in employment and value added from agriculture to manufacturing and services—are essential parts of economic development. Traditionally, these two processes are viewed as interconnected: as agricultural productivity rises, people migrate to cities to work in increasingly more complex industries. Cities, with their higher population densities, benefit from "agglomeration economies," meaning productivity per worker tends to be higher in urban areas. However, in today’s developing countries, particularly in Sub-Saharan Africa, the relationship between urbanisation and structural transformation appears to be changing. First, urbanisation is happening earlier, with countries reaching higher urban population shares at lower income levels. Second, this urban growth often results in informal settlements, or "slums," which tend to persist over time. A key question arises: do slums hinder productivity growth in non-agricultural sectors?
Two main effects of slums influence productivity. On the one hand, slums provide affordable housing options for rural migrants, accelerating urbanisation and potentially boosting productivity through agglomeration economies. On the other hand, as slums expand, they may squeeze formal residents out of the city. If the economic activities of slum residents are less conducive to productivity-boosting agglomeration economies than those of formal residents, this can slow overall productivity growth. This project formalises these dynamics in a model where workers choose their location and employment sector, factoring in the costs of moving between rural and urban areas and between agriculture and various non-agricultural sectors. These offer different opportunities to workers to accumulate human capital via learning, which is one of the sources of agglomeration economies described in the literature. Finally, a housing market responds to slum expansion by raising formal housing prices, and government enforcement of property rights affects the size of slums.
This has relevant policy implications. Historically, many developing countries have discouraged urban growth; China, for example, restricts migration through the hukou system. Although Sub-Saharan African governments may lack the capacity for such stringent controls, they can still influence urban migration, for instance, by cracking down on slums. This project provides tools to evaluate how urbanisation affects structural transformation and productivity, informing decisions around urban policy. Kenya exemplifies these trends: rapid urbanisation, declining manufacturing, and the rise and persistence of slums, particularly in the capital Nairobi, which houses Kibera, one of Africa’s largest slums. To understand the impact of these dynamics, the model will be applied to data from Kenya. This will help assess whether current levels of property rights enforcement support or hinder economic growth. Although Kenya is a primary focus, this study’s findings will have relevance for other rapidly urbanising countries in the region with fast-growing cities, such as Nigeria (Lagos), Ethiopia (Addis Ababa), and Rwanda (Kigali).
