Does basic infrastructure shape the urbanization–growth relationship? Evidence from a cross-country panel

Abstract

Urbanization has the potential to create agglomeration advantages; however, the extent to which these advantages are realized may vary with the infrastructure available to support increasingly concentrated populations. This study examines whether the relationship between urbanization and economic growth varies with the level of basic-services infrastructure using an unbalanced panel of 158 economies over 2000–2024. Data are drawn from the World Bank’s World Development Indicators. A Basic Services Infrastructure Index is constructed using principal component analysis of access to electricity, urban drinking water, and urban sanitation, while Internet penetration is treated separately as a measure of digital connectivity. Using two-way fixed-effects estimation, the study examines direct and moderating relationships while accounting for country and year effects. The results indicate no statistically significant direct association between urbanization and GDP-per-capita growth. However, the positive and statistically significant interaction between urbanization and basic-services infrastructure indicates that the urbanization–growth association becomes more favourable as access to basic services increases. In contrast, Internet penetration does not exhibit a statistically significant moderating relationship. The basic-services interaction remains stable across multiple robustness specifications, although it weakens in the restricted sample for which human-capital data are available. Finally, marginal-effects analysis does not identify a statistically significant positive infrastructure threshold within the observed range. Overall, the findings highlight the importance of considering basic-service capacity when examining the relationship between urbanization and economic growth.