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As countries develop, they restructure away from agriculture and urbanize. But structural transformation and urbanization patterns differ substantially, with some countries fostering migration out of agriculture into rural off farm activities and secondary towns, and others undergoing rapid agglomeration in mega cities. Using cross-country panel data for developing countries spanning 1980-2004, the analysis in this paper finds that migration out of agriculture into the missing middle (the rural nonfarm economy and secondary towns) yields more inclusive growth patterns and faster poverty reduction than agglomeration in mega cities. This suggests that patterns of urbanization deserve much more attention when striving for faster poverty reduction.

Achieving Shared Growth --- ICT Applications --- Poverty --- Poverty Reduction --- Regional Economic Development --- Rural non-farm economy --- Rural Poverty Reduction --- Rural-urban transformation --- Structural transformation --- Urban concentration --- Urban Development

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This paper develops a dynamic model that explains the pattern of population and production allocation in an economy with an urban location and a rural one. Agglomeration economies make urban dwellers benefit from a larger population living in the city and urban firms become more productive when they operate in locations with a larger labor force. However, congestion costs associated with a too large population size limit the process of urban-rural transformation. Firms in the urban location also benefit from a public good that enhances their productivity. The model predicts that in the competitive equilibrium the urban location is inefficiently small because households fail to internalize the agglomeration economies and the positive effect of public goods in urban production.

Agglomeration Economies --- Communities & Human Settlements --- Congestion Costs --- Economic Theory & Research --- Health, Nutrition and Population --- Labor Policies --- Macroeconomics and Economic Growth --- National Urban Development Policies & Strategies --- Population Policies --- Public Goods --- Rural-Urban Transformation --- Social Protections and Labor --- Urban Development --- Urban Housing and Land Settlements