Explaining the Phenomenon of Third World Urban Giants

The Effects of Trade Costs

Traditional push-and-pull factors offered partial explanations to the size of large urban areas in the third world. Moreover, the growing literature in economic geography identifies an additional factor exacerbating the phenomenon, namely trade costs. The present study tests econometrically the proposed hypothesis, whether higher trade barriers intensify the concentration forces in third world urban centers. That is, whether trade costs interact with the traditional push-and-pull effects and exacerbate the concentration effects. In particular, controlling for the traditional push-and-pull effects we incorporate two additional variables in order to capture trade costs within and across borders, respectively. The results suggest mixed support for the traditional push-and-pull effects. Higher trade costs within borders seem to reduce the concentration forces in urban centers. In addition, we find no evidence that trade barriers across boarders encourage concentration. Finally, the evidence from sensitivity analysis suggests that the results need to be treated with caution. (JEL-Classifications: F12, F13, F15, R12)