1. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 7 Urbanization and Rural-Urban Migration: Theory and Policy

2. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-2 Migration and Urbanization 1.Urbanization: Trends and projections 2.Why do cities exist? Agglomeration economies 3.Harris-Todaro Model of Migration 4.Are LDC cities “too big?” 5.Policies toward migration and urbanization

3. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-3 1.Trends and Projections Urbanization: www.gapminder.orgwww.gapminder.org Greater urbanization is associated with higher per capita income – India and Botswana are “normal” % Population living in cities > 1 million Varies Among High Income Countries – Partly Geography – History? Europe

4. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-4 Figure 7.1 Urbanization and Per Capital Income in Selected Countries

5. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-5 Figure 7.2 Urbanization across Time and Income Levels

6. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-6 Figure 7.3 Proportion of Urban Population by Region, 1950-2030

7. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-7 Figure 7.4 Megacities: Cities with Ten Million or More Inhabitants

8. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-8 Figure 7.5 Estimated and Projected Urban and Rural Population of the More and Less Developed Regions, 1950-2030

9. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-9 Slumdog Crorepati

10. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-10

11. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-11 Lima

12. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-12 Manila

13. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-13 Figure 7.6 Annual Growth of Urban and Slum Populations, 1990-2001

14. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-14 2. The Role of Cities Agglomeration economies – Lower transport costs for intermediate and finished goods – Large pool of workers to draw from – Large pool of firms to work for – Increased specialization: “The degree of (firm, worker) specialization is limited by the extent of the market.” Adam Smith

15. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-15 2. The Role of Cities (continued) “Spillovers” (Externalities) – Learn from firms doing similar work Joint ventures “Steal” workers Manage work flow by contracting out and/or subcontracting

16. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-16 2. The Role of Cities (continued) Result: Clusters of firms in same industry in same geographic area – Silicon Valley – Show firms in Sinos Valley, Brazil and Guadalajara, Mexico – Artisans of same trade band together

17. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-17 Dualism in Cities Formal Sector – Government, large businesses – Capital intensive – High(er) wages and often benefits Informal Sector – Labor intensive – Unorganized, unregulated, mostly legal – Often, Self- or Family-employed

18. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-18 Dualism in Cities (continued) Informal Sector – Street vendors, letter writing, knife sharpening, your weight, recycling, prostitution, snake charming, mechanics, carpenters, barbers, personal servants, – Labor intensive – Unorganized, unregulated, mostly legal – Often, Self- or Family-employed – Destination for many (most) migrants

19. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-19 Figure 7.8 Importance of Informal Employment in Selected Cities

20. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-20 3. The Harris-Todaro Model 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 formal sector job is inversely related to the urban unemployment rate – High rates of migration are outcomes of rural urban imbalances A Diagrammatic Presentation

21. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-21 Figure 7.12 The Harris-Todaro Migration Model

22. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-22 Equilibrium in the Harris-todaro Model 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

23. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-23 Add the Informal Sector 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 L I is employment in Informal W I is wage in Informal sector

24. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-24 Figure 7.11 Schematic Framework for Analyzing the Rural-to-Urban Migration Decision

25. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-25 4. Are LDC Cities “Too Big?” “The Urban Giantism Problem”

26. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-26 Table 7.1 Population of the Largest and Second-Largest Cities in Selected Countries (millions)

27. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-27 Are LDC Cities “Too Big?” Marx and Engels: – It is in cities that people would come to understand that, in capitalists societies, “all that is solid melts into air.” – Urban-industrial development is a necessary stage in historical development, leading to upheavals of peasants and proletarians. Gareth A. Jones and Stuart Corbridge (2010),“The Continuing Debate about Urban Bias” Progress in Development Studies 10-1:1-18

28. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-28 Are LDC Cities “Too Big?” Tostoy, Blake, Rushkin: – “The country-side is paradise,” approximately. Gandhi: – “hospitals are institutions for propagating sin” – Railways are the “carriers of plague germs” which “increase the frequency of famines” – “machinery is like a snake-hole;” the source of Europeans’ enslavement of themselves – Good conduct can only be nurtured in villages

29. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-29 Are LDC Cities “Too Big?” Jacobs (1969): “Without cities, we would all be poor.” World Bank (2000): “Levels of urbanization and GDP per capita are closely and positively related.” Gapminder.org

30. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-30 Are LDC Cities “Too Big?” There is tremendous poverty (squalor) in the shanty towns of cities. – Yes, but people still choose to move there, indicating how much worse conditions are in the rural areas.

31. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-31 Are LDC Cities “Too Big?” The Todaro-Smith:rural-urban migration is greater than the urban areas’ abilities to create jobs and provide social services But Hans Rosling says, it is less expensive to provide health and education (Chapter 8) in urban areas than in dispersed rural areas – Example: Montana

32. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-32 Are LDC Cities “Too Big?” Todaro-Smith: Development policies have been characterized by an “Urban Bias” – Bulk of infrastructure investment going to cities (but that’s where the growth is) – Wage rates set artificially high in urban areas (yes in the formal sector; no in informal sector) – Ag prices set artificially low (yes, in 1950s-70s) – But most of these price distortions have been removed since the 1980s

33. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-33 Are LDC Cities “Too Big?” Todaro-Smith: Urban Bias results from the unequal political power between urban and rural areas. – Cities more educated, richer – But rural elites (at least) still have substantial influence (“voice”), especially in democracies (Montana, India: ag subsidies for water, power) Economics: Invest where social rate of return (benefit-cost ratio) is highest

34. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-34 Figure 7.9 Youth Unemployment Rates, 1995 and 2005

35. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-35 Figure 7.10 Components of Migration in Selected Countries

36. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-36 5. Policies to Slow Migration Doug’s Note: Policies based on the premise that migration should be reduced Five Policy Implications – Reduction of urban “bias” in development – Higher education fosters increased migration and unemployment (Doug: so halt education?) – Wage subsidies can be counterproductive – Programs of integrated rural development (Doug: Cost-benefit?)

37. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-37 5. Policies to Slow Migration Create a urban-rural balance (Doug: that’s what migration does) Expand small, labor intensive industries (C-B?) Eliminate factor-price distortion (Doug: Yes!) Choose appropriate technologies (Doug: Mostly private sector) Modify the linkage between education and employment (Doug: Hire least qualified?) Reduce population growth (Doug: Done) Decentralize authority

38. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-38 Case Study: India

39. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-39 Banerjee: A Case Study of Delhi Earnings in Formal sector (only) 9% greater than in Informal sector, controlling for age, education, etc. 14% of Informal sector workers are non- wage (self- or family-employed) Non-wage Informal sector workers earn 47% more than Formal sector workers

40. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-40 Banerjee - 2 Movement from Informal to Formal Sector: – 5 - 15% of rural migrants into the Informal sector moved into Formal sector after 1 year – Rate of entry from Informal sector into Formal sector was 1/6 to 1/3 that of rate of direct entry into Formal sector from outside the area 2/3 of entrants to Formal sector found their jobs through personal contacts

41. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-41 Banerjee - 3 Most migrants were attracted by Informal sector work, rather than the possibility of being hired into the Formal sector Duration of unemployment after migration is short – 64% find work within a week – Average waiting time for first job = 17 days

42. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-42 Banerjee - 4 Migrants kept close ties to rural roots – 75% visit their rural villages – 2/3 remit part of income – Average Remittance = 23% of income => Modify Harris-Todaro model to take account of Informal sector; low unemployment

43. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-43 Case Study: Botswana

44. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-44 Lucas: Migration amongst the Batswana Urban earnings much higher than rural earnings (68% higher for males) – But differential is much less when control for education and experience More likely to migrate if: – Higher expected earnings – Higher probability of employment - Migration is economically rational

45. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-45 Lucas - 2 Earnings rise with time in urban center – Not because of shift to Formal sector – Rather, because of pay increases within the Informal sector => Modify Harris-Todaro model to take account of Informal sector; low unemployment

46. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 7-46 Concepts for Review Agglomeration externalities Congestion Efficiency wage Expected income Induced migration Informal sector Labor turnover Localization economies Present value Rural-urban migration Social capital Todaro migration model Urban bias Urbanization economies Wage subsidy