Reverse causality between urbanization and economic growth: a global test on the validity of urbanization-led economic growth

In the field of development and spatial-economic literature, urbanization is considered a significant factor that brings about positive changes, stimulating welfare and economic advancement. However, there is a growing body of research that challenges this perspective, questioning the idea that urbanization leads to growth. Consequently, a number of recent studies have discovered limited or minimal evidence supporting the assumed positive impact of cities and urbanization on a nation's economic development. Our paper begins by considering the concept of "reverse causality" and aims to examine whether economic growth plays a significant role in driving structural urbanization within a country. In the current study, we utilize data spanning from 1971 to 2019 for 106 countries with varying economic levels and demographic dividend groups. We employ an augmented bootstrap panel Granger causality method to investigate the relationship between economic growth and urbanization. Our findings reveal a prevalent unidirectional causality, specifically from economic growth to urbanization, in a significant number of high- and upper-middle-income countries. Conversely, we observe an absence of such causal relationships in low- and lower-middle-income countries, as well as in post, late, and pre-demographic dividend countries. The results of the study suggest that urbanization might serve as more of an indicator rather than a driving force of economic development, as stated by Bloom et al. (Science 319:772-775, 2008). These findings carry important implications for both theoretical understanding and policy-making, particularly for developing countries in the global south that are currently experiencing rapid urbanization. These countries are allocating a significant portion of their resources toward the establishment of new cities and the revitalization of existing ones, potentially at the expense of investments in rural areas, for economic growth. The study's findings call into question the effectiveness of this approach and strategies in order to strike a balance between urban development and rural investment.