Urban Issues, Rural – Urban
Migration, Informal Sector, Income diversification
Richer countries have a
higher share of their population living in urban areas.
Page 313
There is thus, in cross
section, a positive relationship between urbanization and per capita
income.
In addition, urbanization is
occurring in just about every country.
Page 314 and below
% of Total Population in
Urban Areas
WRI Earthtrends
More urban areas
More people born in urban areas
People moving to urban areas (see 319)
Does urbanization cause
income growth?
Is urbanization simply
correlated with income growth?
What are the economic benefits
of locating a firm in the city?
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.
Backward
linkage (again) – When a firm buys a good from another firm to use as an input
(suppliers are easily available, labor force is trained in the skills you need)
Forward
linkage (again)- When a firm sells a good to another
firm. (transport costs are reduced)
Knowledge spillovers. Learn by
watching competitors.
Scale
issues – contract out work to other firms if an order is too big for the given
firm.
Consumer
behavior – locate in the area where consumers are used to going to buy the kind
of product you produce.
Collective
action is possible, since there is likely to be a harmony of interest on some
issues.
Krugman pointed out that under an import substitution
industrialization strategy, focus on the domestic economy can lead to
concentration in a single city, as producers want to be near the largest number
of consumers to lower transport costs.
Border points don’t grow up
to take advantage of cross border trade.
What are the disadvantages of
locating a firm in the city?
Congestion
costs due to high population density and infrastructure limits.
Infrastructure
may become so strained that services become better outside of the city.
Real
estate costs are higher.
[list
others]
How did cities come to be
located where they are?
Many in the developing
countries arose because of transportation routes created during the colonial
era and the nature of the colonial economy.
“All roads lead to
In many cases, you can’t go
from smaller city to smaller city without going through the capital.
“Urban Giantism” The largest city in
developing countries holds a very large share of the national population.
Buenos Aries,
A different aspect of this
urban giantism is that there is often quite a size
gap between the largest city and the second largest city. (table on 326)
Toronto: Montreal, New York:
LA ratio is 1.3
London and
Paris 7 to next biggest city.
Buenos Aires 9.7
Santiago 14.3
Bangkok
around 20.
[others
in table 7.5]
This can reflect a “First
city bias”. The country’s largest city
receives a disproportionately large share of the public investment and
incentives for private investment in relation to the rest of the economy.
Politics of
the matter.
Unstable countries tend to have
higher urban concentrations.
To stay in power, the
government gives benefits to the urban dwellers that in turn attract more
migrants from the rural area.
Subsidized rice, low meat
prices, parades, evangelical preachers in the parks, more varied and interesting
media,…
“Bread and circuses”
|
Stable Democracies Urban Concentration 23% |
Stable Dictatorships Urban Concentration = 30% |
|
Unstable Democracies Urban Concentration 35% |
Unstable Dictatorships Urban Concentration = 37% |
Ades and Glaeser argue that to
stay in power, throw money (bread and circuses) at the urban population to keep
them from revolt. However, this will
draw further population inflows.
Lobbying or
plain corruption. Locate where the political decisions are
made, since economic benefits are allocated by government.
Further exacerbated by the
fact that the first city is often the capital – keep those who can get to you
fastest happy.
Rural-Urban
migration.
Why do people move from one
area to another?
Recall the Lewis model, and moving
people from subsistence agriculture to manufacturing. This can apply here if we add a spatial
component to the story.
In the Lewis model, people
moved to the manufacturing sector since the wage was higher there than in the
agricultural sector.
But what about when there is
urban unemployment?
Why do they keep coming?
People move in response to
expected income. Migrants consider the
average wage prevailing in the rural and urban sector, and factor in the
probability of finding a job at the prevailing wage.
If I stay home, I am sure to
get $1 per day from my farm.
If I move to
My expected benefits would be
in favor of staying and not moving to
If I move to
My expected benefits would be
in favor of moving to
More complicated
presentations of this idea add in search costs, the time element, the migration
costs, uncertainty about rural income,… Present value calculation of net benefits
versus net costs.
This model predicts that
rural-urban expected wage differentials factor into the decision, rather than
simply rural-urban wage differential.
This means you can have
continuing migration to urban areas in spite of high unemployment rates.
1) Migration responds to a consideration of
benefits versus costs.
2) Decision is based on expected rather than
actual wage differentials.
3) The urban employment rate increasing
increases the benefits of migration.
4) Migration rates can be positive in spite of
unemployment.
What does this tell us?
The imbalance in wages
between rural and urban areas should be addressed by both increasing the
returns in rural areas and reducing the benefits urban workers receive.
Wage subsidies can be
counterproductive.
Integrated rural development
can be critical in reducing urban unemployment.
Urban job creation alone will
not help, and can in fact make things worse.
Education investments may
serve as a signaling device in such a setting leading to inefficient allocation
of scarce educational resources.
The
informal sector.
The
unorganized, unregulated, unregistered sector of the economy. Migrants
create their own work when they get to the city. Hawking, letter writing, barbers, shoe
shiners…
Can account for the majority
of urban employment in developing countries [see figure 7.6].
Also need to realize that
this can exist in the rural sector as well.
Large
number of small scale producers and service activities.
Lack access
to financial capital.
Lack of benefits such as
health care, social security, …
Lack protection from the formal
security forces, and may in fact be subject to harassment by them.
Note that it is linked to the
formal sector. It provides inputs to the
formal sector (get that guy who fixes the wiring from near the goat meat shop)
and formal sector employees often use the services of the informal sector
(Livingston notes the shoe-shine guys in
Is the informal sector a
transition to a formal sector arrangement, or is it a permanent condition that
we need to work with in and of itself?
The formal sector can’t
really grow fast enough to accommodate urban workers.
Not much transition to formal
from informal.
“Missing middle”
What are the benefits of an informal sector?
1) Informal sector exists and works even under
conditions of neglect or harassment.
This suggests it might be capable of growth if the environment changes.
2) They make do with low capital and high labor
mixes, which reflects the situation of developing countries better than the
high capital requirements often found in the formal sector.
3) Training role, on the job learning.
4) Due to constraints, develop innovative uses
of local resources.
5) Recycling waste materials.
6) Many are poor, so improving the lot of the
poor goes along with improving the informal sector.
7) In some cases, many are female, so improves
the economic prospects of women.
What are the drawbacks of an
informal sector?
1) No quality control, no health standards, no
legal recourse.
2) Environmental damage of unregulated economic
activity.
3) Urban congestion. Set up on sidewalks. Build on school playing fields and
roadsides. Build in the middle of the
road.
4) Increase incentives to migrate from rural
area to urban area.
What will help the informal
sector?
1) Reduce red tape (DeSoto’s
book: In
2) Training in ways that help the informal
sector.
3) Increase access to capital
Livingstone points out a few
issues worth mentioning, and we will follow up on the third next.
1) Informal sector is not just an urban
phenomenon, but also a rural one.
2) Trade is a critical portion of the informal
sector, and women in the informal sector tend to be here.
3) Household splitting, with some members in the
formal sector, some in the informal sector.
Changing economic activities
is not necessarily the same as migration.
Household level income
diversification strategies can also be important to understand.
Why do households diversify
their income sources?
Reardon (WD 25:5, 735-737; 1997).
1) Reduce income risk by diversifying income
sources ex ante (don’t know if it will be a good farming year, so I put up a
beehive and sign up to help build the road just in case).
2) Maintain food security by diversifying income
sources ex post (crops failed, so I go to the forest and chop us some firewood
to sell).
3) Earn cash to invest in future improvements
(my field only grows crops I eat, so I will carry bags of rice for the local
trader to get some money to buy a plow).
4) Labor rich, capital poor economies. Often little in the way of barrier to entry
(no union or guild in informal economy, but note caste issues may arise).
What are the main patterns
you might see in rural areas:
1) Employment in the nonfarm labor market in the
area.
2) Employment in the farm labor market in the
area.
3) Self-employment in the nonfarm labor market
in the area.
4) Employment in the migration labor market (to
either farm or non farm employment).
Until
the 1980’s, the prevailing view was that rural people farmed, and that was the
main story. A variety of studies of
rural households finds that non-farm income ranges from 22 to 93% of total
income on average, and that the average lies somewhere around 45%.
In
the sample of northern
Reardon also notes that there is a high degree of inequality in the
distribution of non-farm income among rural households.
The share of non farm income
in total income is two times higher in upper income tercile
households compared to lower tercile households.
From the Kenya and Ethiopia
Data I am working with:
|
|
Milk |
Slaughter |
Livestock sale |
Trade |
Wage, salary |
Non food aid net gift |
Food aid |
harvest |
|
Top |
180 |
12 |
58 |
38 |
83 |
9 |
12 |
26 |
|
Fourth |
71 |
5 |
28 |
8 |
14 |
3 |
13 |
5 |
|
Third |
33 |
2 |
17 |
4 |
3 |
1 |
12 |
2 |
|
Second |
14 |
1 |
6 |
2 |
1 |
1 |
11 |
1 |
|
Bottom |
16 |
0 |
2 |
1 |
0 |
-1 |
5 |
1 |
Across income classes, we see
that there are different income generation profiles.
With regard to
diversification of income sources, it is important to distinguish between a
given household diversifying into different activities and diversification of
different households in a given community into different activities.
To make this distinction, we
construct a measure of activity concentration that sums the square of the
percentage income from each activity.
That is, say a household gets
all their income of $3 from selling lemonade.
Say their neighbor gets half
their income of $3 from farming and half from fixing bike tires.
Say another neighbor gets one
third from milk sales, one third from farming, and one third from building
houses.
At the household level, they
may have the same income, but they differ in how diversified they are.
Average household diversity
in a community:
In the Kenya sample, the concentration
of income sources from highest to lowest is as follows: Dirib Gumbo (.90),
Kargi (.89), Logologo (.88), Ngambo (.82), North Horr (.76), and Sugata Marmar
(.75).
We can contrast this by
taking the average income for the different activities across households and
then computing the measure of concentration for the community average.
Average income in community
diversity:
At the community level,
concentration of income sources from highest to lowest is as follows: Logologo (.28), Dirib Gumbo (.27), Kargi
(.24),
This indicates there is a
great deal more diversification between households than there is within
households. Distinguish between
comparative advantage diversification and jack of all trades diversification.
There
are also intra-household aspects to income diversification. Women and men’s tasks differ.
Intrahousehold
income diversification.
Milk sales
in northern
Women sell milk, firewood,
charcoal.
Men involved in livestock
trading: 82% of sellers in our market
monitoring were males.
How are benefits distributed?
Is having one member entering
a new activity going to benefit the household overall?
How will a new opportunity
interact with existing culture?