# 2.3 Agglomeration in African economies

Ghana, along with the rest of the African continent, has urbanized very rapidly. 9% of the Ghanaian population lived in urban areas in 1931 (Songsore, n.d.) and this increased to 51% by the time of the 2010 population census. The World Bank estimates that the urban population of Ghana increased by 3.5 times between 1984 and 2014 (World Bank, 2015). It is thus expected that the benefits of agglomeration would be evident in Ghana and other African economies that are rapidly urbanizing, as they have been evident in the recent experiences of many Asian economies (eg Au and Henderson (2006) on Chinese cities). East Asian economies have shifted from a primarily agricultural base to a manufacturing‐based economy and then to a services‐based economy, ie they have undergone structural transformation. However, a number of studies have demonstrated that there has been no structural transformation in African economies (McMillan and Rodrik, 2011), despite levels of urbanization similar to those in Asia. This has been argued to be because of low levels of agricultural and manufacturing productivity (Jedwab, 2013). Increasing urbanization without industrialization suggests that urbanization has not been accompanied by a growth in productivity generated by agglomeration across the continent.

Jedwab (2013) argues that urbanization in Ghana and Ivory Coast has been driven by the formation of consumption cities, cities that have evolved due to the production of resource export commodities (cocoa in the two countries he studied). In Jedwab’s stylized model resource exports generate a surplus which is spent on urban goods and services, drawing people into cities and creating urbanization without either an increase in agricultural yields from a green revolution or increased productivity in manufacturing. This is thus a model in which urbanization does not lead to agglomeration economies, although the absence of agglomeration economies is not tested directly.

Collier et al (2018) test for agglomeration economies in cities using a firm‐level dataset constructed from the World Bank Enterprise Surveys from 111 cities in 51 low‐ and middle‐income countries. They do this by testing whether city size and population density affect productivity, wages, firm size and city employment. City size and density, proxies for agglomeration economies, are found to increase productivity, wages, firm size and employment, but these benefits are not as great in African cities as they are for cities in Latin America and Asia. This is some evidence that African cities are not generating agglomeration economies as they grow rapidly.

As far as we are aware there are no other studies examining both urbanization and localization economies in African economies. Duranton (2016) examines urbanization economies in Colombia but notes that examining localization economies in developing countries is hard since much employment is informal and often not measured, which is why his paper only examines urbanization economies. Collier et al (2018) note that whilst a strength of their study is the range of countries, the study uses the World Bank Enterprises Surveys (WBES), which are limited to formal sector firms with more than 4 employees.

The Ghanaian firm censuses we use in this paper covered all non‐household‐based firms with a permanent location, as well as household‐based firms with a sign advertising the firm, whether formal or informal. Since the informal sector is such a large part of the economy in Ghana and almost all African economies our data are arguably a more useful source of data to test for agglomeration economies than the data of Collier et al (2018), which covered the formal sector only. The coverage of formal and informal firms means that we can examine both urbanization economies and also localization, which Duranton (2016) notes is usually impossible because of the lack of detailed sectoral information due to coverage being limited to formal sector firms only.

6