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, the authors 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.From the conclusions, regarding policy implications:
. . . [I]nvestments in rural areas are often onerous because substantial resources are needed to reach a population that is scattered among vast territories. To the extent that urbanization can have substantial poverty-reducing effects on rural areas, urban investments may become an important complement to rural investments in poverty- reduction strategies. P. 35.