The following is an article by me that appeared in ISB’s in-house magazine insight June 2008 issue.
There is a definite positive relationship between the size of the habitation and the productivity of the population.”
The full article is below.
Urbanization and Development of India
Economic growth and development is intimately connected with the urbanization of the population. The relationship holds empirically, both across time and space. Analytically it is easy to see why economic growth and development is both a cause and consequence of urbanization.
The scale and quality of the basic habitation unit determines the success of an economy. A large number of small villages is sufficient for poverty; a number of large cities is necessary for prosperity. Specifically with reference to India, the vast majority of the population lives in villages and ekes out a meager existence from agricultural related activities. For India to develop, it is imperative that India’s 700 million rural inhabitants have the opportunity to live in urban areas and work in non-agricultural sectors.
The world is getting urbanized
The big picture clearly shows that the world is getting urbanized at an accelerating pace. The entire world’s population was around 900 million in the year 1800. Less than 3 percent of that population—about 27 million people—lived in cities. The world population nearly doubled in the next hundred years. By 1900, the global population had grown to 1.6 billion, of which only around 10 percent were urbanized. Now, another hundred years later, more than half the world’s population of over 6 billion lives in cities. Estimates place around 70 percent of the world’s projected population of 10 billion in the year 2050 in cities. Human civilization is becoming a predominantly urban civilization.
There is a definite positive relationship between the size of the habitation and the productivity of the population. From ancient times, larger cities have produced disproportionately more of the innovations, advances, and the production of every sort of goods and services. We recall the names of ancient cities because things of importance happened in them, mostly of the type that advanced human knowledge and capacity.
As global population has grown, the size of the average major city has grown alongside. Today we have what can be called “mega-cities” or “mega-regions.” They bear the same relation to the average city of today as in the past a large city bore to a small town or a village.
The mega cities are easy to identify. They are collection of tens of millions of people whose annual production is measured in trillions of dollars. Their names are familiar: Greater Tokyo (a $2.5 trillion economy of 55 million people), Boston-Washington corridor ($2.2 trillion, 54 million people), and mega regions around London, Frankfurt, Chicago, Atlanta, Rome, Amsterdam, etc.
Around 1.2 billion people live in 40 mega regions of the world, and produce two-thirds of the world’s output of goods and services. They also produce more than 85 percent of all global innovation. Which means that the rest of humanity – nearly 5 billion people, or four times as many people as those who live in the mega regions – living in 191 countries produce only a third of the global output and only a sixth of the innovations? 
That point is worth stressing. A person living in a mega-region compared to a person not living in a mega-region is eight times as productive in terms of goods and services, and in terms of innovations is about 24 times as productive.
Cities are engines of growth
Cities are engines of growth because they “manufacture” wealth. This is literally true as most manufacturing occurs in urban locations. That is why rich economies are predominantly urban, and those economies that are largely rural are relatively poor. The transition from a poor economy to a rich one depends on the transition of the majority of the population from being rural to urban.
There is a definite trend and a correlation between the growth of cities and the progress of human civilization. This relationship is established by the increased production of goods and services. This creation of wealth is a consequence of the urbanization since urbanization makes manufacturing possible.
There is more stuff relative to people today than existed any time in our history because manufacturing stuff requires less labor per unit of output. That’s what economists call “economies of scale”: the cost of production per unit goes down as the volume of production goes up. Large manufacturing units produce stuff more efficiently.
Large manufacturing units require lots of people and large amounts of supporting activities, which in turn require even more people. In other words, a population living in a collection of villages is not as productive as the same population living in a city and engaged in manufacturing. Cities are the engines of growth because they make manufacturing possible, and manufacturing has scale economies.
Infrastructure and Cities
Manufacturing requires cities because the high population and high population densities of cities reduces the cost of getting things done. Another way of stating that is to say “transaction costs” are lower in cities. This is explained by the nature of infrastructure.
Infrastructure has “scale economies” – the larger the amount of infrastructure, the lower the cost per unit of infrastructure. Thus the high aggregate demand for infrastructure in urban areas allows sufficiently large supplies at lower average costs. Lower costs translate into more efficient services and therefore the advantage that cities have over rural areas in conducting business.
An example: Providing Education
There are a number of well-known causative factors that lead to economic growth. Among them are an educated and healthy population, reliable and adequate infrastructure, a free and fair market-driven economy, and the availability of public goods such as law and order, political freedom, efficient governance, etc. These causative factors have complex interdependencies and have to be present—simultaneous in time and co-located in space—for economic growth and development. These factors of economic growth can be most efficiently provided in—and are usually associated with—cities.
Cities provide educated people the opportunity to use their skills because cities have the supporting infrastructure and other skilled people, both of which are necessary for skilled people to fully utilize their specialized skills.
Cities aggregate a large number of people with different skills which make all of them mutually dependent for being productive. Furthermore, the education of the next generation itself is most efficiently provided in cities. Thus cities are the centers not just for the use of education but also the provision of education.
An attempt at providing highly diverse and sophisticated education to small village populations is prohibitively expensive. Every center of excellent learning – schools, colleges, and universities – is associated with urban areas, either from the beginning or from the urbanization of the place where a great center of learning is created.
Given a large enough population at a specific location, the demand for education will be sufficient for its efficient supply. A lot of people are required to provide the educational services. These people in turn need supporting services that are provided by even more people in that location.
To provide for the needs of the people, infrastructure—power, telecommunications, houses, parks, roads, water, sanitation, etc—is needed. To provide all the infrastructural services, you need yet more specialized people. Following this line of reasoning you soon reach the conclusion that it needs a city. It needs a city because a city is at the heart of a developed modern complex highly skilled highly specialized economy. Any developed and rich economy is primarily a collection of cities.
It is important to keep in mind that the central concern of economic growth and development is the development of people. For far too long, Indian policy has conflated the development of rural people with development of villages. That confusion has predictably led to waste of time and resources. Village development is costly because India has too many – over 600,000 – and if the limited resources available for development is spread out over them, then per village the amount available is not sufficient to affect major changes.
By insisting on the development of villages, scarce resources, which could have been more efficiently used elsewhere, are wasted. There is another way of using the same resources, and that is the development of cities. Thus, paradoxically, the answer to rural development – or more accurately the development of rural people – actually lies in the development of urban areas.
Urbanizing India’s Population
The rural population of India has to urbanize. The existing cities, however, are bursting at the seams and cannot possibly accommodate any more people. Practically all Indian towns and cities are unplanned and inefficiently use land and other resources. They are arguably inadequate for the current residents, leave alone adding hundreds of millions more people to them. The existing urban centers would do with a massive makeover but doing that is expensive. 
There’s a need to have new urban centers to accommodate the hundreds of millions of rural people. Imagine building absolutely new cities from scratch for 600 million people. Imagine 600 new large cities of one million people each. Imagine building houses, schools, shopping centers, parks, factories, roads, public utilities, hospitals, libraries, . . . And imagine doing that using the best urban planning known to humanity.
That is the greatest opportunity India has – of building from scratch – which is not available to any developed economy such as the US. American cities are notoriously inefficient in terms of resource use and sustainability. Their legacy urban centers will burden the transition to living in more sustainable cities.
But India does not have that legacy burden.  Most Indians living in villages would welcome the chance of living in well-designed efficient cities. They are already doing so as is evidenced by the fact that tens of millions of rural people migrate to cities – often choosing to live in urban slums. They are voting with their feet saying that life in an urban slum is preferable to life in a village.
The economic development of India requires economic growth. Cities are engines of growth because there is a bi-directional link between urbanization and growth. Therefore the rural people have to be urbanized for India’s development and growth. Every economy has followed that path which begins with agriculture being the main source of income for the majority of the population and ends with agricultural employment being a very small fraction of the total labor force.
India needs to stop making little plans and start thinking big.
Make no little plans. They have no magic to stir men’s blood and probably themselves will not be realized. Make big plans; aim high in hope and work, remembering that a noble, logical diagram once recorded will never die, but long after we are gone will be a living thing, asserting itself with ever-growing insistency. Remember that our sons and grandsons are going to do things that would stagger us. Let your watchword be order and your beacon beauty. Think big.
Daniel Burnham (1846 – 1912)
Visionary urban planner and Chicago architect
. It is a reasonable guess that you, the reader, are unlike the average citizen of a developing country in the sense that you live in a city and are engaged in non-agricultural work. Moreover your above average income is related to your living and working in an urban area.
. In the year 1900, the world’s 10 largest cities were (in descending order of population) London, New York City, Paris, Berlin, Chicago, Vienna, Tokyo, St Petersburg, Manchester, and Philadelphia. The combined population of those 10 cities was approximately 26 million. By 2005, just Tokyo — the largest city then — itself had 35 million people, followed by Mexico City with 19.4 million. Mumbai with 18.2 million ranks 5th. [Source: www.192021.org ]
. The Rise of the Mega Regions Wall Street Journal April 12, 2008.
. There’s an interesting analogy illustrating the burden of a legacy. The US had one of the best landline based telecommunications system in the world by the early 1970’s. That legacy system actually prevented them from transitioning to a more efficient mobile telephony system in the 1990’s. India, given that there was no landline telecommunications system to speak of, immediately leapfrogged the twisted copper-wire stage and went straight to the more efficient wireless system. Sometimes it helps to arrive late.