Urbanization and productivity at a global level: new empirical evidence for the services sector

Abstract

Studies in developed countries show a positive relationship between urbanization and productivity; however, this is often not the case for developing countries. This is due to the absence of conditions permitting the expression of agglomeration economies, such as the lack of complementarity between city size and individuals' education, and high levels of informality. Given the increasing importance of services in terms of employment and production, this article analyzes the relationship between the rapid urbanization and tertiarization of developing countries and the productivity of the services sector. Fixed effects and dynamic panel models are estimated using data for a sample of 91 countries between 1990 and 2018. The results indicate that urbanization increases the productivity of services in developed countries but has the opposite effect in developing countries. This evidence supports the recent literature on urbanization without growth in developing countries for the case of the services sector.

Drivers of services sector growth acceleration in developing countries

“…Urbanization not only entails an increase in the urban population but also a transition from rural to urban systems in terms of changes in the industrial structure, employment, living conditions, and public services (Mendez et al 2022). Urbanization therefore drives services sector growth both directly and indirectly.…”