Which comes first—urbanization or economic growth? Evidence from heterogeneous panel causality tests

Liddle, Brantley and Messinis, George (2013): Which comes first—urbanization or economic growth? Evidence from heterogeneous panel causality tests.

Abstract

Heterogeneous panel causality tests are employed to consider the relationship between urbanization change and economic growth (i.e., differenced logged GDP per capita). Income- and geography-based panels demonstrated substantial variation in that relationship. Urbanization caused economic growth in high income countries, but non-causality could not be rejected for both middle-income and Latin American countries. A bi-directional, equilibrium relationship was uncovered for low-income, predominately African countries where economic growth had a positive, causal effect on urbanization, but where urbanization, in turn, had a negative, causal effect on economic growth. Hence, urbanization and economic growth either co-evolve, as they do for low income/African countries and (likely) for high income countries, or else the two processes are somewhat decoupled, as they are for middle income and Latin American countries, despite their high degree of correlation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Heterogeneous panel causality; Economic growth; Urbanization
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O18 - Urban, Rural, Regional, and Transportation Analysis ; Housing ; Infrastructure; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O54 - Latin America ; Caribbean; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O55 - Africa

References

Apergis, N. and Tang, C. 2013. Is the energy-led growth hypothesis valid? New evidence from a sample of 85 countries. Energy Economcis 38, 24-31.

Bai, J. and Carrion-i-Silvestre, J. (2009) Structural changes, common stochastic trends, and unit roots in panel data. Review of Economic Studies, 76, pp. 471-501.

Banerjee, A. and Carrion-i-Silvestre, J. 2006. Cointegration in Panel Data with Breaks and Cross-Section Dependence. European Central Bank, working paper 591, Frankfurt am Main, Germany.

Bairoch, P. (1988). Cities and Economic Development: From the Dawn of History to the Present. Chicago: University of Chicago Press.

Beall, J. and Fox, S. 2009. Cities and Development. Routledge, Hoboken.

Bloom, D., Canning, D., and Fink, G. 2008. Urbanization and the wealth of nations. Science, 319, 772-775.

Di Iorio, F. and Fachin, S. (2012) Savings and Investments in the OECD - A panel cointegration study with a new bootstrap test. DSS Empirical Economics and Econometrics, Sapienza Universita di Roma, working paper 2012/2.

Dumitrescu, E. and Hurlin, C. (2012) Testing for Granger non-causality in heterogeneous panels. Economic Modelling, 29, 1450-1460.

Fay, M. and Opal, C. 2000. Urbanization without growth. A not-so-uncommon phenomenon. World Bank Policy Research Working Paper, WPS 2412.

Gibbs, D. 2000. Ecological modernization, regional economic development and regional development agencies. Geoforum, 31, 9-19.

Halicioglu, F. 2007. Residential electricity demand dynamics in Turkey. Energy Economics 29, 199-210.

Henderson, V. 2010. Cities and development. Journal of Regional Science, 50(1), 515-540.

Henderson, V. (2003). The urbanization process and economic growth: The so-what question. Journal of Economic Growth 8: 47-71.

Heston, A., Summers, R., and Bettina A. (2012) Penn World Table Version 7.1, Center for International Comparisons of Production, Income, and Prices, University of Pennsylvania.

Hossain, S. 2011. Panel estimation for CO2 emissions, energy consumption, economic growth, trade openness and urbanization of newly industrialized countries. Energy Policy 39, 6991-6999.

Liddle, B. 2013a. Urban density and climate change: A STIRPAT analysis using city-level data. Journal of Transport Geography 28, 22-29.

Liddle, B. 2013b. The energy, economic growth, urbanization nexus across development: Evidence from heterogeneous panel estimates robust to cross-sectional dependence. The Energy Journal 34, 223-224.

Liddle, B. and Lung, S. 2014. Might electricity consumption cause urbanization instead? Evidence from heterogeneous panel long-run causality tests. Global Environmental Change 24, 42-51.

McCoskey S. and Kao, C. (1999). Testing the stability of a production function with urbanization as a shift factor. Oxford Bulletin of Economics and Statistics, 671-690.

Michieka, N. And Fletcher, J. 2012. An investigation of the role of China’s urban population on coal consumption. Energy Policy 48, 668-376.

Mishra, V., Smyth, R., and Sharma, S. (2009). The energy-GDP nexus: Evidence from a panel of Pacific Island countries. Resource and Energy Economics.

Pesaran, M. and Smith, R. 1995. Estimating long-run relationships from dynamic heterogeneous panel. Journal of Econometrics, 68, 79-113.

Pesaran, M. (2004). General Diagnostic Tests for Cross Section Dependence in Panels. IZA Discussion Papers 1240, Institute for the Study of Labor (IZA).

Shahbaz, M. and Lean, H.H. 2012. Does financial development increase energy consumption? The role of industrialization and urbanization in Tunisia. Energy Policy 40, 473-479.

Todaro, M. 1995. “A model of rural-urban migration,” in Meir, G. (ed.) Leading Issues in Economic Development, Oxford University Press, Oxford, 140-145.

Wheaton, W. and Shishido, H. 1981. Urban concentration, agglomeration economies and the level of economic development. Economic Development and Cultural Change, 30, 17-30.

Windmeijer, F., 2005. A finite sample correction for the variance of linear efficient two-step GMM estimators. Journal of Econometrics 126 (1), 25–51.