Urbanization and Growth : Evidence from Developing Countries

The urbanization process and causality between urbanization and economic development are very enigmatic. This causal relationship deviates enormously across different economies. Contrary to the conventional literature, we found a U-shaped quadratic relationship between urbanization and growth using the panel of 50 developing countries from 1980 to 2016. Our findings demonstrate that at a lower level of urbanization, growth reduces due to less availability, concentration, and synchronization of the factors of production. The concentration of physical and human capital and technological advancement in urban areas help developing countries achieve economic growth at a higher level of urbanization. This research contributes significantly to the literature by investigating the role of financial flows in urbanization and their impact on economic growth in developing countries using the System-GMM approach. Robust estimations divulged that foreign aid spent on infrastructure development and expanding urban areas help promote economic growth. Nevertheless, remittances act as a resilient factor buffering the rapid pace of urbanization and reducing growth by resisting the migration of labor and capital from rural to urban areas