Module 5: Urbanization and Rural-

Urban Migration: Theory and Policy

PREPARED BY: MRS. CATHERINE U. MALIG, MBA
REFERENCE: ECONOMIC DEVELOPMENT BY: M.TODARO AND SMITH
Urbanization
Cities will increasingly become the main players in the
global economy.
—Kofi Annan, former secretary general of the United Nations
and Nobel laureate for Peace

By fostering economic growth, urbanization helped reduce

absolute poverty in the aggregate but did little for urban
poverty.
—Martin Ravallion, Shaohua Chen, and Prem Sangraula, 2008
Copenhagen City, Denmark Shibuya Crossing, Tokyo Japan Makati City
The Migration and Urbanization
The phenomenon of massive and historically
unprecedented movements of people from the
rural countryside to the burgeoning cities of
Africa, Asia, and Latin America.
The positive
association between
urbanization and per
capita income is one of
the most obvious and
striking “stylized facts”
of the development
process.
Proportion of
Urban Population
by Region, 1950-
2050
Estimated and
Projected Urban
and Rural
Population of the
More and Less
Developed
Regions, 1950-
2050
Annual Growth
of Urban and
Slum
Populations,
1990-2001
The Role of Cities
Agglomeration economies:
Urbanization general growth of a concentrated geographic region
economies.
Localization (industry or sector) economies
Saving on firm-to-firm, firm-to-consumer transportation (forward linkage)
Firms locating near workers with skills they need (backward linkage)
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)
Backward linkages refer to inputs to the oil, gas, and mining projects
from the national economy, which can include local community-
focused procurement, such as security, clothing and food supplies
and high value=added items, such as capital machinery and
equipment.
Forward linkages are created by adding value to the commodities
extracted by the industry by processing and refining in order to
locally to produce finished goods instead of exporting them in their
raw state. The economic viability of forward linkages varies from
commodity to commodity. Examples gold, coal and iron.
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)
Urbanization Costs, and Efficient Urban Scale
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
Urbanization Costs, and Efficient Urban Scale
CONGESTIONS COSTs
1.The higher the urban density, the higher the costs of real estate. It is much
more expensive to build vertically than horizontally, increasingly so as
skyscraper scale is reached, so that when market forces work properly, tall
buildings are built primarily when urban land costs become high.

2. In large urban areas, workers may find themselves with longer and longer
commutes and greater transportation costs and may demand higher wages
to cover these costs

3. the costs of infrastructure such as water and sewer systems are higher in
concentrated urban areas.
 38 cities in the Philippines

Highly urbanized cities

Independent component cities
Component cities
Municipalities (white)

https://upload.wikimedia.org/wikipedia/commons/f/fd/Cities_
and_municipalities_of_the_Philippines.png
The Urban Giantism Problem
There may be general urban bias
Cities are capital intensive so may expect large cities commonly located
in developed countries
Urbanization in developing countries has taken place at unexpectedly
rapid pace
Huge informal sectors in shantytowns
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
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
Politics and Urban Concentration
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
◦ Policies for the Urban Informal Sector
◦ Women in the Informal Sector
Importance of
Informal
Employment in
Selected Cities
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
Components of Migration in Selected
Countries
Schematic
Framework for
Analyzing the
Rural-to-Urban
Migration
Decision
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
ASSUMPTIONS:
1. There are two sectors, rural and urban The Harris-
2. Migrants will be unemployed Todaro
3. Migration decision is based on expected Migration
income rather than just wage differentials. Model
The Harris-
Todaro
Migration
Model
The Harris-
Todaro
Migration
Model
Toward an Economic Theory of Rural-
Urban Migration (cont’d)
LM
WA = (W M )
LUS
Legend:
WA is agricultural income,
LM is employment in manufacturing
LUS is total urban labor pool
WM is the urban minimum wage
Four characteristics of the TODARO
migration model
1. Migration is stimulated primarily by rational economic considerations of relative
benefits and costs, mostly financial but also psychological.
2. The decision to migrate depends on expected rather than actual urban rural real-wage
differentials where the expected differential is determined by the interaction of two
variables, the actual urban-rural wage differential and the probability of successfully
obtaining employment in the urban sector.
3. The probability of obtaining an urban job is directly related to the urban employment
rate and thus inversely related to the urban unemployment rate.
4. Migration rates in excess of urban job opportunity growth rates are not only possible
but also rational and even likely in the face of wide urban rural expected income
differentials. High rates of urban unemployment are therefore inevitable outcomes of
the serious imbalance of economic opportunities between urban and rural areas in most
underdeveloped countries.
 SHORTCOMINGS OF THE HARRIS TODARO MODEL

1.BY EXPRESSING THE EXPECTED WAGE OF THE RURALLY BASED POTENTIAL MIGRANT IN
TERMS OF THE MODERN SECTOR WAGE, IT ASSUMES THAT THE POTENTIAL MIGRANT
HAS THE ABILITY TO GAIN EMPLOYMENT IN THE MODERN SECTOR
2.IT DOES NOT EXPLAIN THE MIGRATION BEHAVIOR OF THE LESS EDUCATED RURAL
INDIVIDUAL WHOSE ASPIRATIONS ARE KEYED TO MODEST EMPLOYMENT IN THE
INFROMAL SECTOR.
3.AN ALTERNATIVE EXPLANATION IS REQUIRED FOR THEOR MIGRATION EXAMPLE
MOVING BACK AND FORTH SPECIALLY DURING HARVESTING SEASON.
4.THE ANALYSIS PRESENTED ARE POINTS TO THE IMPORTANCE OF FACTOR PRICES FOR
RESOURCE ALLOCATION AND EMPLYMENT CREATION AND THE URBAN BIAS INHERENT
IN POLICIES DESIGNED TO PROMOTE INDUSTTRIALIZATION AT THE EXPENSE OF
AGRICULTURE
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
Summary and Conclusions: A Comprehensive
Migration and Employment Strategy
◦Create an 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
Terms to review
Agglomeration economies Present value
Congestion Rural-urban migration
Efficiency wage
Social capital
Harris-Todaro model
Todaro migration model
Induced migration
Informal sector Urban bias
Labor turnover Urbanization economies
Localization economies Wage subsidy
END OF MODULE 5
What are the economic benefits of locating a firm in the city? Some of this goes back to our
endogenous growth theory concepts: Agglomeration economies – cost advantages to producers
and consumers when others choose to locate in the same area as you choose to locate in.
Urbanization economies – general benefits of growth in a concentrated geographical region.
Transport issues. Access to consumers. More sophisticated and specialized economy. More
workers looking for jobs. Amenities: More stuff to do, better media,…
Localization economies – effects captured by particular sectors of the economy as they grow in a
given area. o Backward linkage (again) – When a firm buys a good from another firm to use as an
input o Forward linkage (again)- When a firm sells a good to another firm. o Knowledge
spillovers. Learn by watching competitors. o Scale issues – contract out work to other firms if an
order is too big for the given firm. o Consumer behavior – locate in the area where consumers
are used to going to buy the kind of product you produce. o Collective action is possible, since
there is likely to be a harmony of interest on some issues.