A.F. Ades and E.L.

Glaeser (1995) Trade and circuses:

explaining urban giants, pp. 195-227
Background:

What factors encourage the concentration of an urban population in a single

city:
o High tariffs, high costs of internal trade and low levels of international
trade increase the degree of concentration
o Politics relating to instability leads to urban primacy
o Dictatorships have cities 50% larger than democracies
35% of Argentinas population is concentrated in Buenos Aires
As total population increases, concentration in the nations largest city falls
Nations with high shares of trade in GDP, good transport networks low tariff
barriers rarely have populations concentrated in a single city
Political forces drive urban centralisation dictatorships, political instability
raises city size
Concentration of population in urban areas increases THEN decreases with
per capita GDP
Concentration of government expenditures lead to urban concentration

Alternative theories of urban giants 3 forces driving concentration of

urban population in a single city:

Trade and commerce:

o When transportation is expensive, activities cluster to economise on costs
HENCE urban concentration is higher when transport is more expensive
o Protectionism leads to domestic suppliers to dominate the market HENCE
prices are lower for goods in the city because firms locate in the city
HENCE workers come to city to pay lower prices for domestic goods
o Central cities have a comparative advantage in commerce HENCE grow
with trade HENCE this argues against Krugman and Livas (1992) who
claim there is a negative correlation between trade and concentration
Industry:
o Movement away from agriculture raises urban centralisation
o Centralising population lowers transport costs and raises aggregate
demand for a fixed level of GDP positive correlation between urban
centralisation and industrial expansion industrialisation leads to
clustering of firms as infrastructure costs can be shared also results in
intellectual spillovers and access to larger pool of labour
o Larger cities specialise in products
Government and politics:
o Political power of a capitals population encourages government to
transfer resources to the capital HENCE attracting migrants/rent-seekers

o
o
o

Weak governments create urban concentration as they are unable to

protect life outside the capital whilst dictatorships choose not to protect
life in the weak hinterland
Dictatorships have higher taxes in the hinterland and more unstable
regimes lower taxes in the capital idea of maintaining power (votes)
Gap between taxes in countryside and city increases when democracy falls
and instability rises
Fig II:
Shows lower democracy leads to upward shift in Countryside Tax
because the MC of taxing countryside (ability of countryside to hurt
government) has fallen
New equilibrium is B countryside and city tax are higher
Increase in instability raises exploitation HENCE City Tax shifts left
new equilibrium is C both tax rates fall BUT reduction is more
important for the city
D shows effect of dictatorship and instability
2 factors limiting taxation on hinterland are democracy and movement of
population in hinterland to the capital strong democracy means tax rate
on hinterland is initially low HENCE instability raising taxes on hinterland
has a smaller migration effect

Estimation strategy:
o Large urban population indicates features of that country attract people to
the central city
o Freedom to migrate and utility in each location is locally decreasing in the
number of people in that location

The data:

Description of the data:

o 100 urban agglomerations with two million inhabitants or more in 1985
these cities account for 487 million inhabitants representing 10% of the

o
o

worlds population and 24% of the worlds urban population 40 of the

100 large urban agglomerations are in more developed regions of the
world
Large urban agglomerations in the developed world grew at around 1%
per year, those in developing nations grew at 3.3% per year
Three of the five largest main cities in the world are in less developed
nations Mexico City, Shanghai and Sao Paulo

Results:

Higher levels of central city populations are positively associated with

larger/more populated countries, higher levels of GDP per capita and high
shares of labour force outside agriculture
Central city population is negatively correlated with dictatorships, share of
trade in GDP and share of government transportation and communication
expenditures in GDP
Growth rate of main city population is positively correlated with dictatorships,
revolutions and coups and high tariff barriers
Main cities are on average 42% larger than capital cities power attracts
population
An increase in size of a country represents a decline in population density
possibly indicating an increase in transportation costs of supplying the
hinterland
Concentration of population in a single city may give local firms a transport
cost advantage over foreign suppliers HENCE lowering the amount of foreign
trade
Large cities tend to generate rent-seeking and instability NOT long-term
economic growth

Case studies rise of urban giants:

Buenos Aires 1900:

o By 1914, Buenos Aires was the largest urban agglomeration South of new
York City with 1.6 million inhabitants (20% of Argentinas population)
o Argentina government was hostile towards manufacturing and innovation
heavy taxes on manufactured exports and absence of patent protection
o Trade expanded total exports 400% between 1887-1914
o 20% of Argentinas population was involved in commercial activities
o Buenos Aires became a commercial centre centre for migration
o From 1904-1909, immigrants to Argentina totalled around 1 million many
settling in the city retained these immigrants due to undeveloped
transport networks, absence of pre-existing urban centres, decline in
demand for labour in the hinterland and instability in the hinterland
o Politics led to Buenos Aires growth- in 1914, 95% of government revenues
came from tariffs government supported trade Buenos Aires became a
centre for international movement of goods/capital
Mexico City today:
o By 1970, Mexico Citys population was 8.5 million, today it is around 18
million

o
o
o

o
o

Trade did NOT play a role in Mexico Citys growth city grew as a centre
for manufacturing industrial wages grew by 250% between 1945-1970
and employment grew by 120%
Employment in the service sector grew by 600%
Mexico City was a major market for goods and was the major supplier
Consumers located close to domestic suppliers in Mexico City due to
import-substitution policies foreign suppliers were excluded from the
country
Industrial growth thrived as Mexico City was the centre for foreign capital
and ideas
Power concentrated in the capital HENCE politics also contributed to
Mexicos size

Conclusion:

Krugman and Livas (1992) hypothesis is that urban concentration is

negatively related to international trade
Good internal transportation infrastructure decreases urban concentration
BUT trade and cities are connected HOWEVER urban concentration may
cause lower levels of trade
Idea that dictatorships cause urban concentration
Power in the hands of few agents in urban giants allows leaders to extract
wealth from hinterland and distribute it to the capital
Concentration of wealth in urban areas attracts migrants along with safety of
capital and transfers given by leaders to quell local unrest