Beginning in the 1970's, and accelerating in the 1980's, the sub-field of development economics in Anglophone universities was taken over by neo-classical economists. One major element in the neo-classical economists' critique of the earlier perspective, which emphasized industrialization and society-wide dynamic structural change, focused on the purportedly anti-agrarian policies, or "urban bias" that resulted from industrial policies. This attack lent the neo-classical critique a populist flavor and positioned them as sympathizers of downtrodden peasants in Africa and Latin America.
Prominent contributions in this literature included work by economist Michael Lipton and Harvard University political science professor Robert Bates. Urban bias was a common element in a number of studies produced by the World Bank after Ann Krueger took over and expelled developmentalists and those supportive of industrial policy (including a former professor of mine, Swarthmore's Larry Westphal, a Korea expert).
The basic argument of the urban-bias literature was that developing world governments had erred in following policies that reportedly reduced the incentive to invest in commercial agriculture. Farmers were taxed heavily so as to provide capital for urban industrialization, and governments intervened to lower the prices of food products to satisfy urban consumers. Having supposedly demonstrated the urban bias of Third World governments, scholars such as Robert Bates then developed a conceptually subtle argument rooted in the political incentives faced by these governments. Bates argued these governments favored urban areas because they were more vulnerable to threats from politically mobilized urbanites (particularly in capital cities) than they were from politically demobilized rural areas.
A number of scholars have challenged this analysis. T.J. Byres offered an early critique in the 1970's, challenging the empirical claim that third world governments discriminated against commercial agriculture. Byres argued that the urban bias thesis was rooted in a fundamentally flawed understanding of the nature of development. The urban bias critique is based on general equilibrium models of the economy, and emphasizes static allocative efficiencies. In contrast, development economics historically was rooted in earlier models that emphasize structural change and the shifting of surplus labor (ie the unemployed) from rural areas into higher productivity activities, largely in manufacturing. Industrial and manufacturing sectors tend to be more dynamic over time and are the engine of economy-wide technological progress. More recent empirical work by Dani Rodrik suggests that this earlier understanding is in fact correct. Rodrik has found that high growth economies in East Asia, and a few standout economies of Latin America (Brazil, Argentina, Mexico), have benefited from a shift of labor from low productivity agricultural and informal activities into the dynamic and fast growing industrial sector.
Massoud Karshenas has added to Byres earlier critique by noting that in much of the empirical literature on urban bias, the degree of urban bias was heavily influenced by the degree of currency overvaluation. In a detailed examination of a World Bank study on South Korea, Karshenas found that the degree of currency overvaluation closely follows World Bank economists' estimation of urban bias, which in Korea's case was high in the early and mid-1960's and then fell off dramatically. Currency overvaluation is an extremely poor and misleading proxy for urban bias, because maintaining an overvalued currency simultaneously harms all tradable goods sectors, including manufacturing in addition to agriculture.
This, strangely enough, leads us back to the old bugbear of neoclassical economics:
mercantilism. Dani Rodrik, an economist based at Harvard University, has suggested that one of the fastest ways for poor countries to become wealthier is to foster economy-wide structural change. As a practical matter, the easiest way to do this is to maintain a dramatically undervalued currency for several decades, as the successful industrializers in East Asia have done. An extraordinarily undervalued currency makes all tradable good -- both agricultural and industrial -- hyper competitive in international markets. It functions according to mercantilist precepts as a tax on imported products and a subsidy to exports simultaneously. This helps to explain anamolies such as why the US runs a trade deficit in fruits and vegetables with China, a country with very little water, and very little arable land that is also located four to seven thousand miles away from most US consumers. The undervalued Chinese currency equally subsidizes manufactured goods such as computers, clothing and furniture exported to the US as well as apples, tomatoes and fruit juice. Thus, a water and land rich economy, the United States, has a large trade deficit in fruits and vegetables with a country that has very little water and very little arable land.
Sources:
T. J. Byres. 1979. "Of Neo-Populist Pipe-Dreams: Daedalus in the Third World and the Myth of Urban Bias."
The Journal of Peasant Studies. 6(2): 210-244.
Massoud Karshenas. 1996. "Dynamic economies and the critique of urban bias."
The Journal of Peasant Studies. 24(1-2): 60-102.
