Cities are recognised as engines of economic growth. The greatest percentage of gross product generated throughout the world is produced in urban areas. This is so because of certain fundamental economic principles called agglomeration effects or economies of scale. These economies of scale multiply the effect of economic activity, resulting in greater growth, productivity and ultimately employment.

Development studies also recognises the importance of these effects, but typically describes them in terms of linkages—backward to suppliers and forward to producers of other intermediate goods or final products. The linkages of development and the agglomeration effects of urban economics are essentially the same. Support for these linkages or agglomeration effects, then, should figure prominently in development literature and practice because of their importance to growth in both output and employment. A review of both development literature and donor programmes shows this support is largely absent.

Research was undertaken in two post-socialist urban economies—Yerevan, Armenia and Sofia, Bulgaria—to determine if these linkages are forming and, more importantly, if they are associated with growth. The research shows linkages are forming in both cities and are associated with growth. However, the Sofia study exhibits two patterns differing from the Yerevan study. First, backward links from firms in Sofia extend beyond the city's borders to other cities in Bulgaria. The statistical result is the same for inter-city linkages as it is for intercity linkages in the research sample. Second, factors other than linkages appear to cause high rates of growth in Sofia.

The research suggests policies and programmes should strengthen linkages in urban areas. Of primary importance is the provision of credit so firms may modernise, thus improving the quality and competitiveness of their output. Industrial policy should also target opportunities for selective import substitution to increase domestic production and employment.