ECN 3053: Economic Development :

Theory and Practice

Lecture note

Chapter 7
Urbanization
and Rural-Urban
Migration: Theory and
Policy

Muditha Karunarathna
Dept. of Economics and Statistics

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-1

 Urbanization: Trends and Living
Conditions

• 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

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-2

 68% of the world population
projected to live in urban areas
by 2050, says UN

Global trends in urbanization

Urban and rural population of the world, 1950–2050. (UNDESA, 2014)

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-3
 • The global trend in urbanisation is not the same in all parts of the world.
Asia and Africa currently have the highest rates of urbanisation.
• Figure shows a comparison of trends in more or less developed regions
of the world.

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-4

 Changes in Urban and Rural Population by Major
Areas between 2011 and 2050 (in millions)

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-5

Relationship between
Urbanization and Per
Capita GDP, 2010
with Comparison to
Relationship in 1960

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-6

 Proportion of Urban Population by Region,
1970–1995

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-7

Megacities: Cities with 10 Million or More Inhabitants

• The UN forecasts that “by 2030, the world is projected to have 43 megacities, most of
them in developing regions.” Jakarta will have overtaken Tokyo as the largest urban
agglomeration. Karachi, Manila, and Cairo will round out the top five
Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-8
Total Population in Millions by City Size Class, 1970, 1990,
2011 and 2025

• In principle, a megacity
could offer large
agglomeration economies,
although congestion costs
may rise rapidly.
• Another potential downside
is that megacities tend to
be more capital intensive,
which does not match with
the comparative advantage
of most developing
countries.

• Megacities, particularly in low-income countries, may also have outsized social and
health problems.
• The relative balance of these factors is likely to differ across countries depending on
the forces that led these cities to reach their megascales
Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-9
 Estimated and Projected Urban and Rural Population of the
More and Less Developed Regions, 1950–2050

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-10

 Annual Growth of Urban and Slum
Populations, 1990–2001

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-11

.7-12

Slumdog Crorepati

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-12

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-13
.7-14

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-14

.7-15

Manila

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-15

 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)

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-16

 The Role of Cities
• What explains the strong association between urbanization
and economic development?

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-17

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-18
 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

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-19

 Urbanization Costs, and Efficient
Urban Scale
• But, cities also entail “congestion costs”
• Economically efficient urban scale (from point
of view of productive efficiency) found where
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
Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-20
 The Urban Giantism Problem

• There may be general urban bias

• Cities are capital intensive, so may expect that
large cities are 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

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-21

 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

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-22

 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

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-23

 The Urban Informal Sector

• Policies for the Urban Informal Sector

• Women in the Informal Sector

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-24

 Importance of Informal Employment in
Selected Cities

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-25

 Youth Unemployment Rates, 1995 and
2005

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-26

 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

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-27

 Components of Migration in Selected Countries

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-28

 Toward an Economic Theory of
Rural-Urban Migration : 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 city job is
inversely related to the urban unemployment
rate
– High rates of migration are outcomes of rural
urban imbalances
• A Diagrammatic Presentation
Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-29
 Economic theory of urban –rural
migration : Harris Todaro Model

• Why migrate? Expected return vs cost

• Cost: lose rural job
• Return : Probability of an urban job
- Version 1: urban unemployment
- Version 2: informal job

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-30

 Rs 300/day Rs 150/day Rs 600/day
100% chance 75% chance 25 % chance

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-31

 The Harris-Todaro Migration Model

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-32

 HT- Labor Market friction

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-33

 Toward an Economic Theory of Rural-
Urban Migration –HT model

Equilibrium 1

LM
WA = (WM )
LUS
Where
WA is agricultural income,
LM is employment in manufacturing
LUS is total urban labor pool
WM is the urban minimum wage
Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-34
 The Harris-Todaro Migration Model

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-35

 Toward an Economic Theory of Rural-
Urban Migration –HT model

Equilibrium 2

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-36

 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

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-37

 In-Class Example of the Harris-
Todaro Model
• Start with equation on the previous slide:
• Rural wage = $1.50 per day
• Urban modern wage = $3 per day
• Urban traditional income = $.25 per day
• Suppose there is a .5 probability of getting a modern
job. Will there be migration?
• Calculate expected urban income and compare to
rural income. Important: you cannot work in two
sectors at the same time!
• E(YURB) = (.5)(3) + (.5)(.25)
• = 1.50 + .125 = 1.625 > 1.50 = YRUR
• So the individual migrates - even though half receives
just a small fraction of the rural income.
Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-38
 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

Copyright ©2015 Pearson Education, Inc. All rights reserved. 7-39