1. Development Economics V (cntd.) Prof. Dr. Hans H. Bass Jacobs University, Spring 2010

2. March 11, 20102 Development Economics Agenda Feb. 25 / March 11 1.Urbanization 2.The Urban Informal Sector 3.Rural to Urban Migration

3. March 11, 20103 2. The Urban Informal Sector The Lewis Model Revisited  Two sectors: agriculture and modern urban sector  in agriculture MPL = 0  agricultural wage rate = average product  institutional inflexibility of wage rate in the modern sector: (a) trade unions, (b) employment strategies of TNCs  agricultural wage rate < modern sector wage rate

4. March 11, 20104 2. The Urban Informal Sector The Lewis Model Cntd  rural to urban migration exceeds employment opportunities in the modern sector  rationing of modern sector employment according to formal education  short-term reaction: all sorts of odd jobs  long-term reaction: investment into formal education  increased growth potential by accumulation of human capital  however: employment rate increases only if industrialization more rapid than population growth

5. March 11, 20105 2. The Urban Informal Sector Characteristics Why is, in spite of the continuous flow of migrants, urban unemployment still low? IS “discovered” 1973 by Keith Hart (Accra) and ILO mission to Kenya: (1) ease of entry (2) reliance on indigenous resources (3) family ownership (4) small scale of operation (5) labour intensive and adapted technology (6) skills acquired outside the formal school system (7) unregulated and competitive markets (Source: ILO 1973)

6. March 11, 20106 2. The Urban Informal Sector Definitions of the IS "a mode of organisation different from the unit of production most familiar in economic theory, the firm or corporation. These activities are also likely to be unregulated by the state and excluded from standard economic accounts of national income" (Swaminathan/WIDER, 1991, p.1) "units of production, services and commerce whose management method differs from that of the modern sector (in particular the absence of standardized accounts)" (Lachaud/ILO 1994, p. 94) units engaged in the production of goods and services with the primary objective of generating employment and incomes to the persons concerned; low level of organization (= small scale: 1-n) with little or no division between labour and capital as factors of production; activities not necessarily performed with the deliberate intention of evading the payment of taxes or infringing labour or other legislation (vs. underground economy) (15th International Conference of Labour Statisticians: ILO Official Bulletin 1993)

7. March 11, 20107 2. The Urban Informal Sector Importance of informal Employment

8. March 11, 20108 3. Rural to Urban Migration Harris-Todaro Model  High rates of migration are outcomes of rural urban imbalances. Migration proceeds in response to urban-rural differences (returns minus costs) in expected income rather than actual earning  = Migration responds positively to both higher urban wages and higher urban employment opportunities (= probabilities). The probability of obtaining a city job is inversely related to the urban unemployment rate.  Migration rates in excess of urban job opportunity growth rates are rational.

9. March 11, 20109 3. Rural to Urban Migration Harris-Todaro Model

10. March 11, 201010 3. Rural to Urban Migration Consequences of the HT model Which would be the result of the creation of more urban modern-sector jobs? Which would be the result of an expansion of formal education in the country? What would be the effect of wage subsidies to increase labor- intensity of production?... of efficiency wage rates to increase productivity? How to overcome the “urban bias* / first-city bias”? * Michael Lipton, 1977

11. March 11, 201011 3. Rural to Urban Migration Consequences of the HT model  Create a urban-rural balance  Expand small, labor intensive (rural) industries  Eliminate factor-price distortion  Choose appropriate technologies  Modify the linkage between education and employment  Reduce population growth  Decentralize authority

12. March 11, 201012 3. Rural to Urban Migration Quizz http:// wps.aw.com/ aw_todarosmit_econdevelp_ 10/85/21785/5577112.cw/index.html

13. Development Economics VI Prof. Dr. Hans H. Bass Jacobs University, Spring 2010

14. March 11, 201014 Development Economics Agenda March 11 1.Health and Education in Economic Development 2.The Human Capital Approach to Health & Education 3.Educational Systems and Development

15. March 11, 201015 1. Health and Education in Economic Development Health and Education  Health and education are important objectives of development and also important components of growth and development (dual role)  Greater health capital may improve the returns to investments in education and vice versa  Increases in income often do not lead to substantial increases in investment in children’s education and health  significant market failures in education and health require policy action

16. March 11, 201016 2. The Human Capital Approach to Health and Education Age-Earning Profiles

17. March 11, 201017 2. The Human Capital Approach to Health and Education The Basics  Initial investments in health or education lead to a stream of higher future income  The present discounted value of this stream of future income is compared to the costs of the investment  Private costs and returns to education have to be compared to social costs and returns

18. March 11, 201018 2. The Human Capital Approach to Health and Education Graphic representation

19. March 11, 201019 2. The Human Capital Approach to Health and Education Rates of Return to Investment in Education

20. March 11, 201020 3. Educational Systems and Development Supply and demand for education demand for high-wage employment in the modern sector (depends on wage differental plus probability to find a job)  derived demand for education (often unrelated to non-economic criteria) supply of education: often unrelated to economic criteria fixed by government expenditures influenced by aggregate private demand

21. March 11, 201021 3. Educational Systems and Development Private and social costs and returns to investment in education

22. March 11, 201022 3. Educational Systems and Development Lorenz Curves for Education

23. March 11, 201023 3. Educational Systems and Development Gini Coefficients for Education, 1990