1. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. Chapter 7 Urbanization and Rural-Urban Migration: Theory and Policy

2. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-2 7.1 The Migration and Urbanization Dilemma As a pattern of development, the more developed the economy, the more urbanized But many argue developing countries are often excessively urbanized or too- rapidly urbanizing This combination suggests the migration and urbanization dilemma Urbanization: Trends and Projections

3. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-3 Figure 7.1 Urban Population and Per Capita Income across Selected Countries

4. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-4 Figure 7.2 Urbanization across Time and Income Levels

5. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-5 Figure 7.3 Proportion of Urban Population by Region, 1950-2050

6. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-6 Figure 7.4 Megacities: Cities with Ten Million or More Inhabitants

7. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-7 Figure 7.5 Estimated and Projected Urban and Rural Population of the More and Less Developed Regions, 1950-2050

8. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-8 Figure 7.6 Annual Growth of Urban and Slum Populations, 1990-2001

9. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-9 7.2 The Role of Cities Agglomeration economies: Urbanization (general) economies, localization (industry or sector) economies Saving on firm-to-firm, firm-to-consumer transportation Firms locating near workers with skills they need Workers locating near firms that need their skills Firms benefit from (perhaps specialized) infrastructure Firms benefit from knowledge spillovers in their and related industries (Also: consumers may benefit from urban amenities)

10. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-10 Industrial Districts and Clustering Quality of clusters, or Industrial Districts, is a key to sectoral efficiency Unfortunately a majority of developing countries have made only limited progress China: a country that has made huge strides in generating industrial districts over the last decade (Findings Box 7.1)

11. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-11 Urbanization Costs, and Efficient Urban Scale But, cities also entail “congestion costs” Economically efficient urban scale (from point of view of productive efficiency) found were average costs for industries are lowest Generally, differing efficient scales for different industrial specializations imply different city sizes More extensive (expensive) capital, infrastructure required in urban areas Smaller cities may be expected in labor-intensive developing countries

12. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-12 7.3 The Urban Giantism Problem There may be general urban bias Cities are capital intensive so may expect large cities commonly located in developed countries But urbanization in developing countries has taken place at unexpectedly rapid pace Huge informal sectors in shantytowns, favelas Large fraction of workers outside formal sector Much urban growth is in mid-size cities, but urban bias remains a serious issue in many developing countries

13. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-13 7.3 The Urban Giantism Problem There may be First-City Bias (favoring largest city) Causes of Urban Giantism: –Import substitution industrialization: less trade, incentive to concentrate in a single city largely to avoid transportation costs –“Bread and circuses” to prevent unrest (evidence: stable democracies vs unstable dictatorships) –Hub and spoke transportation system (rather than web) makes transport costs high for small cities –Compounding effect of locating the national capital in the largest city

14. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-14 Table 7.1 Population of the Largest and Second- Largest Cities in Selected Countries (millions)

15. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-15 Figure 7.7 Politics and Urban Concentration

16. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-16 7.4 The Urban Informal Sector Why promote the urban informal sector? –Generates surplus despite hostile environment –Creating jobs due to low capital intensivity –Access to (informal) training, and apprenticeships –Creates demand for less- or un- skilled workers –Uses appropriate technologies, local resources –Recycling of waste materials –More benefits to poor, especially women who are concentrated in the informal sector

17. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-17 7.4 The Urban Informal Sector Policies for the Urban Informal Sector Women in the Informal Sector

18. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-18 Figure 7.8 Importance of Informal Employment in Selected Cities

19. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-19 Figure 7.9 Youth Unemployment Rates, 1995 and 2005

20. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-20 7.5 Migration and Development Rural-to-urban migration was viewed positively until recently The current view is that this migration is greater than the urban areas’ abilities to –Create jobs –Provide social services

21. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-21 Figure 7.10 Components of Migration in Selected Countries

22. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-22 7.6 Toward an Economic Theory of Rural-Urban Migration A Verbal Description of the Todaro Model –Migration is a rational decision –The decision depends on expected rather than actual wage differentials –The probability of obtaining a city job is inversely related to the urban unemployment rate –High rates of migration are outcomes of rural urban imbalances A Diagrammatic Presentation

23. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-23 Figure 7.11 Schematic Framework for Analyzing the Rural-to-Urban Migration Decision

24. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-24 Figure 7.12 The Harris-Todaro Migration Model

25. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-25 7.6 Toward an Economic Theory of Rural- Urban Migration (cont’d) Where W A is agricultural income, L M is employment in manufacturing L US is total urban labor pool W M is the urban minimum wage

26. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-26 7.6 Toward an Economic Theory of Rural- Urban Migration (cont’d) Five Policy Implications –Reduction of urban bias –Imbalances in expected income opportunities is crucial –Indiscriminate educational expansion fosters increased migration and unemployment –Wage subsidies and scarcity factor pricing can be counterproductive –Programs of integrated rural development should be encouraged

27. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-27 7.7 Summary and Conclusions: A Comprehensive Migration and Employment Strategy Create a urban-rural balance Expand small-scale, labor intensive industries Eliminate factor price distortions Choose appropriate labor-intensive technologies of production Modify the linkage between education and employment Reduce population growth Decentralize authority to cities and neighborhoods

28. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-28 Dualistic Economic Structure Formal sector: organized and regulated economic system (e.g., government agencies, banks); it generates 2/3 of GDP Informal sector: fragmented and unregulated economic system (e.g., street vendors, loan sharks); it generates 1/3 of GDP

29. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-29 Dualistic Labor Market Formal labor market: skilled labor (e.g., government employees, teachers) and professionals with education and license Informal labor market: semi-skilled and unskilled labor (e.g., small business, street vendors)

30. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-30 Urban Informal Sector Most rural migrants find jobs in the “informal” urban labor markets The “informal” urban labor force is a large component of the urban labor force

31. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-31 Informal Urban Labor Force

32. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-32 Informal Employment

33. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-33 Developing Urban Informal Sector Advantages of investment in urban “informal” sector Contributes to economic growth Requires small capital investment Requires low cost of training and education Supplies semi-skilled labor to industry Uses labor-intensive technology to create jobs

34. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-34 Developing Urban Informal Sector Disadvantages of investment in the urban “informal” sector Induces R-U migration Exerts pressure on urban infrastructure Adds to pollution, congestion, and crime

35. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-35 Women in U-Informal Sector Represent the bulk of the informal sector labor supply Earn low wages in unstable jobs with no benefits (e.g., housekeeping) Run micro-enterprises (e.g., home- made foodstuffs and handicrafts) Engage in illegal activities (e.g., prostitution)

36. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-36 Urban Unemployment Urban open-unemployment is in double- digits in many LDCs The problem is much more serious because –Discouraged workers are excluded –Underemployment is not measured

37. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-37 Urban Unemployment

38. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-38 Todaro’s R-U Migration Model Factors affecting migration decision –Expected urban income –Probability of finding an urban job –Cost of living in urban areas Decision criterion: –Migration will take place if the present value of “expected” benefits exceed costs

39. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-39 Todaro’s R-U Migration Model Benefits from migration: Higher urban wage Enjoyment from urban entertainment

40. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-40 Todaro’s R-U Migration Model Costs of migration: Transportation cost Opportunity cost of being unemployed Greater living expenses Psychic cost of being away from home and family

41. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-41 Todaro’s R-U Migration Model Non-economic factors inducing migration: Distance: the farther the distance, the larger is the transportation cost Relatives living in urban areas helping reduce living expenses

42. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-42 Todaro’s R-U Migration Model Non-economic factors inducing migration: Information flow about job openings in the “informal” sector City lights: movie theaters, restaurants, amusement parks, etc.

43. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-43 Todaro’s Migration Decision Tree

44. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-44 Wage Differentials & Employment Agricultural Wage RateManufacturing Wage Rate WMWM W* M W* A WAWA W** A q’ qE M M’ A A’ OAOA LALA L* A =L* M LMLM OMOM At W M, O M L M is urban employment and O A L A is rural employment. L A L M is the “migrant pool: Those who are either unemployed or engaged in low-skilled activities in informal sector

45. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-45 Policies Inducing R-U Migration Neglect of agriculture: industrialization at the expense of agricultural development Urban bias development strategies: investment in urban industrial development Job creation in urban areas by government and manufacturing and services industries

46. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-46 Policies Inducing R-U Migration Educational opportunities in urban areas: R-U brain drain Cash and in-kind subsidies to government employees and factory workers

47. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-47 Policies Reducing R-U Migration Eradicate poverty and reduce population growth Promote rural and agricultural development Create jobs in rural areas: expand small-scale, labor-intensive industries Eliminate factor-price distortions and adopt “appropriate” production technologies Modify direct link between education and employment

48. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 7-48 Concepts for Review Agglomeration economies Congestion Efficiency wage Harris-Todaro model Induced migration Informal sector Labor turnover Localization economies Present value Rural-urban migration Social capital Todaro migration model Urban bias Urbanization economies Wage subsidy