Rural and urban spaces are usually regarded as “separate” in both development theory and practice. Yet there are myriad links between them. Urban areas, including regional urban centers such as local market towns, provide households with new opportunities to sell goods and services. These opportunities increase household income by employing previously unemployed household resources or because households reallocate household resources so as to take advantage of new, more profitable activities. Links to market towns improve the prices received by rural households because households can benefit from increased demand for their goods or because the larger market is better able to absorb production from rural areas without causing prices to decline. These links allow households access to a wider variety of productive inputs and services, to better quality inputs or to inputs that are available on a timely basis. Benefits in terms of price, variety, and quality also apply to the purchase of goods for consumption. Despite the many potential benefits, the importance of local and regional urban centers (towns and small- and medium-size cities, as opposed to large cities and metropolitan areas) to rural livelihoods remains largely under-researched. Knowing more about the nature of links of rural households to market towns is important for guiding regional development policies and poverty-reduction strategies. This paper uses longitudinal data from 15 villages in rural Ethiopia to explore the nature and consequences of these links. It addresses the following questions: (1) What
are the links between rural households and local urban centers? (2) Does better access to local market towns affect household economic behavior? and (3) Does better access to local market towns make households better off? Three core findings emerge. First, rural households undertake a significant proportion of their economic transactions in local market towns. These localities are the site for about half the purchases of inputs used in agricultural production, from a quarter to three-quarters of sales of crops and livestock. They are the primary location of the sale of artisanal products, particularly by women. More than half of household purchases of consumables and various types of foods occur in these market towns. Strikingly, these iii are, largely, the only urban localities in which these rural households undertake economic activities. Apart from remittances, there are few direct links with more distant urban centers or the capital city. Second, access to market towns affects economic activity in rural areas. The more remote they are from these towns, the less likely households are to purchase inputs or sell a variety of products. Third, improved access to market towns has positive effects on welfare. Improving the presence of roads and their quality and improved transport increases consumption outcomes: the effects are substantial and strongly significant. Furthermore, communities with better roads have persistently higher growth rates than others. More remote communities in terms of distance to town have a (relatively weak) tendency to grow slower, beyond any of the effects related to infrastructure. Development debates are predicated on the separateness of urban and rural spaces. But while one should be cautious in overinterpreting the results from this study, given the relatively small number of localities, the results suggest that local market towns and cities play a key role in providing space for the economic activities of rural households. Their role in connecting urban and rural areas suggests that drawing too strong a divide between rural and urban localities, and envisioning that economic activities are confined to respective urban and rural areas, are misleading. Rather than seeing the urban and rural sectors as being distinct, a more fruitful approach is to see them as a continuum, running from the capital city, to larger regional centers, to smaller market towns, to the rural spaces in which our respondents live. The extent to which a strategy focusing more on urban or rural localities will “spill over” onto the other will depend on how closely they are tied together. In our results, market towns and cities are an important source of demand for products produced in rural areas, and rural residents are a source of demand for goods sold in urban areas. Improving the presence of roads, their quality, and improved transport are important factors that will further bind these spaces together and improve rural welfare.