Which comes first—urbanization or economic growth? Evidence from heterogeneous panel causality tests

Heterogeneous panel causality tests are employed to consider the relationship between urbanization change and economic growth (i.e., differenced logged GDP per capita). Income- and geography-based panels demonstrated substantial variation in that relationship. Urbanization caused economic growth in high income countries, but non-causality could not be rejected for both middle-income and Latin American countries. A bi-directional, equilibrium relationship was uncovered for low-income, predominately African countries where economic growth had a positive, causal effect on urbanization, but where urbanization, in turn, had a negative, causal effect on economic growth. Hence, urbanization and economic growth either co-evolve, as they do for low income/African countries and (likely) for high income countries, or else the two processes are somewhat decoupled, as they are for middle income and Latin American countries, despite their high degree of correlation.