Urbanization and Growth : Commission
on Growth and Development

Structural change is a key driver of
rapid growth: countries diversify into new industries, firms
learn new things, people move to new locations. Anything
that slows this structural change is also likely to slow
growth. Because urbanization is one of the most important
enabling parallel processes in rapid growth, making it work
well is critical. Urbanization's contribution to growth
comes from two sources: the difference between rural and
urban productivity levels and more rapid productivity change
in cities. In the early decades of development, when the
majority of the population is still rural, the jump from
rural to urban employment makes a big contribution to
growth. As cities grow larger, the second effect faster
gains in urban productivity - begins to dominate, as it
operates on a larger base. Mortgages can improve
households' ability to buy decent housing. But finance
relaxes demand constraints only. Unless it is accompanied by
measures to increase supply, better finance may result in
overshooting prices. This volatility can jeopardize
macroeconomic stability. In a typical pattern, strong income
growth leads to a rapid increase in housing demand. An
injection of liquidity from some source, often overseas, may
help over stimulate the market, leading to over optimism and
a dangerous concentration of wealth in real estate.