Small City Economies: The Scope for Mobility, and the Threat of Getting Stuck

This blog is part of a series sharing findings from a research initiative of the JustJobs Network and the Centre for Policy Research that examined small cities in India and Indonesia. Read the introductory blog here.

In recent decades, megacities in India and Indonesia—the world’s largest developing country democracies—have grown increasingly inaccessible to rural-urban migrants. For anyone who hasn’t obtained higher levels of education, the potential wage boost in moving from a rural area to a big city has been eroded by increasing skill demands in the labor market and higher costs of living. Indian scholars Amitabh Kundu and Lopamudra Ray Saraswati have even labeled this trend “exclusionary urbanization.”

Small cities, meanwhile, pose fewer barriers for rural-urban migrants. We found that they offer quick benefits to rural youth looking to move up the economic ladder. In Kupang, one of the Indonesian cities we investigated, young male migrants were attracted by opportunities in the informal economy because they offered cash—contrasting this daily wage employment with the non-wage work on their family farms. In small cities that have managed to attract bigger employers, wage work is more likely to be in the formal economy—especially in manufacturing, a sector that has begun to leave the big cities in India and Indonesia.

Aspiring entrepreneurs also find footholds in small cities. A carpenter in Kupang and a marble processor in Kishangarh, one of our Indian case cities, told us inspiring rags-to-riches stories. And small cities have become hubs for rural youth seeking secondary and tertiary education; their proximity to home and lower cost of living make them more realistic places to get a degree.

Yet there is another side to these hopeful stories. Youth in small cities also run the risk of getting stuck in dead-end jobs or winding up with a degree that makes them overqualified for the city’s labor market. 

In Semarang Regency, a peri-urban area we studied in Indonesia, young women find an abundance of apparel firms ready to hire them into jobs that pay the minimum wage; but then they endure the drudgery of routine work that offers little scope for promotion or advancement. Most leave factory toil in their mid-30s to work in the informal economy. In the education hubs of Kupang and Mangalore, a coastal south Indian city we investigated, local governments have struggled to attract high-skilled jobs—leaving their young graduates to face long periods of unemployment or else flee for bigger cities. 

This same paradox that young people face in their individual employment journeys is reflected in the broader challenge of stimulating economic development in small cities. The firms that small cities are most successful in luring are in low-value-added sectors—meaning they look for lots of low-wage, unskilled or semi-skilled workers and cheap land. As we saw in Semarang Regency, this can lead to rapid urbanization and rising incomes for the rural and “rurban” poor. But places like this generally have no long-term economic development strategy; and as land and labor costs rise, the apparel firms will be quick to exit. 

In Kupang, Indonesia’s central government has been pumping money into infrastructure, hoping to create a new economic hub for the impoverished southeastern corner of the archipelago. But the city has no fine-tuned strategy to harness all this investment to build a resilient, rooted economy. 

In short, small cities face the same circumstance as the youth within them: opportunities for quick economic gains, but threats to long-term improvements in economic well-being.

Kishangarh might highlight a way out of this dilemma. The city became a marble-processing hub given its proximity to quarries, but it has now established itself a world leader in marble—to the point that it imports and processes marble from far-flung locations. Kishangarh’s marble sector is run by a local entrepreneurial class that is invested in the city’s economy for the long haul. In short, marble is less likely to leave Kishangarh than apparel is to leave Semarang Regency. 

However, whether workers in Kishangarh reap the benefits of this long-term economic viability depends on a local and national state that values ethical labor standards and fair wages. As of today, Kishangarh’s workers face abysmal working conditions—among the worst of the cities we studied. 

Examples from around the world show that places once like Kishangarh, or our other case cities, can promote long-term economic development while also improving the quality of jobs if they move up the value chain—i.e. invest in higher-quality production while also promoting skill development and cracking down on practices that exploit workers. But this requires more than an entrepreneurial private sector; it demands a government that incentivizes investment in workers and their capabilities. 

Along these lines, our research led us to recommend that small cities pursue economic niches that are relevant to their local assets, but also adaptable, upgradable and “sticky”—i.e. likely to get rooted in place. Another key suggestion is that small cities invest in viable small and medium enterprises within a target sector—rather than trying to make every young person a self-employed entrepreneur. An effective strategy for long-run economic development involves promoting synergistic relationships between big firms and small homegrown enterprises. The latter will grow and the former will have a reason to stay.