| Summary: | Although a high rate of urbanization and a high incidence of rural poverty are two
distinct features of many developing countries, there is little knowledge of the
effects of the former on the latter. Using a large sample of Indian districts from the
1983–1999 period, we find that urbanization has a substantial and systematic
poverty-reducing effect in the surrounding rural areas. The results obtained through
an instrumental variable estimation suggest that this effect is causal in nature and is
largely attributable to the positive spillovers of urbanization on the rural economy
rather than to the movement of the rural poor to urban areas. This rural poverty-reducing
effect of urbanization is primarily explained by increased demand for local agricultural
products and, to a lesser extent, by urban-rural remittances, the rural land/
population ratio, and rural nonfarm employment.
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