Rural Spillovers of Urban Growth

As cities in developing countries continue to grow rapidly, there is little empirical evidence about how this affects growth in surrounding rural economies. We study the effects of shocks to labor demand in cities on village-level economic outcomes, using a new dataset with administrative data from multiple sources on the universe of urban and rural economies in India. We find that, over the period 1990-2013, urban shocks led to increases in aggregate economic activity and non-farm establishment size in villages located 20 km or farther away from their closest city. At the same time, distant villages experienced net population loss, as rural workers relocated closer to urban areas. Labor demand shocks in cities also led to a reconfiguration of the industry composition in surrounding rural economies, with the services sector gaining employment share in nearby villages, and the manufacturing sector gaining share in villages farther away.