Introduction The evolution of conventional wisdom Development economists in the 1950s viewed rural-urban migration and city growth with optimism. Recall: Lewis & Rostow models.City immigration was seen as a favorable process whereby "surplus rural labor was withdrawn from traditional agriculture to provide cheap manpower to fuel a growing modem industrial complex“(Todaro, 1969). Things began to change in the 1960s with evidence of high rates of unemployment: optimism was replaced by a neo-Malthusian pessimism: view immigration to the city with alarm. 2 principal explanations of rapid City growth and Urbanization (1) PUSH: unusually rapid rates of population growth pressing on limited farm acreage, pushing landless labor into the cities. (2) PULL economic forces pulling migrants into the cities: domestic policies that distort prices to favor cities and other factors in favor of energy-intensive or large-scale manufacturing typically urban sectors. Lecture Outline Introduction I-Stylized facts: urban transition A-Urbanization is happening everywhere but faster in LDCs B-Benefits and costs of cities C-The urban Giantism problem: -urban bias -first city bias D-The informal sector

Chapter 5AUrbanization and rural-urban migration

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II-Consequences of migration A-Worsening of the structural imbalance: selective migration B-Who wins, who loses? III-What drives LDCs migration and city growth? A-How does the urban labor work? 1-Recall: how is the labor surplus absorbed from the Lewis model 2-The Todaro model 3-Evidence against Todaro’s job lottery B-Determinants of migration 1-Schematic framework 2-The driving forces 3-New findings by the New Economics of Migration I-Stylized facts: urban transition : Urbanization: trends and projectionsA-Urbanization is happening everywhere but faster in LDCs Urbanization is the shift of population from rural to urban environments: a typical transitory process. It is the consequence of changes in national output composition from rural agriculture to urbanized modern manufacturing and service production. For the US: begun as an Agricultural Economy→ Manufacturing (Industrial Economy ) →Service EconomyMost Developing Economies: Agricultural Economy [too long]→ Manufacturing (Industrial Economy but small) →Service Economy [very, very small]

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Almost all of the increments to the world's population will be accounted for by the growth of urban areas

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Figure 7.4 Megacities: Cities with Ten Million or More Inhabitants

Dramatic modification of the top 15 cities to come

I-Stylized facts: urban transition B-Benefits and costs of cities Benefits Cost advantages to producers and consumers through what are called agglomeration economies (Walter Isard): 2 types -Urbanization economies are effects associated with the general growth of a concentrated geographic region.

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-Localization economies are effects captured by particular sectors of the economy, as they grow within an area (backward and forward linkages). Clustering effect (industrial districts): positive externalities (pecuniary and non pecuniary) are passive phenomenon. Additional benefits can be obtained through joint action (advertising, common R&D): “active collective efficiency” Those benefits that derive from the combination of economies of scale and positive transportation costs constitute centripetal forces. Costs Relate to the lack of mobility of some factors such as land Congestion costs: costs of real estate, costs and time of commuting push upward wages. Gargantuan urban complex induce higher costs of infrastructure such as water and sewer systems Overloading of housing and social services, not to mention increased crime, pollution, and congestion, tend gradually to outweigh these historical urban advantages. Those costs relating to diseconomies of scale constitute centripetal forces Trade off between centripetal [in] and centrifugal [out]forces lead to an optimal city size No case of “black hole effects”: real not nominal income matters!! C-The urban Giantism problem Urban giantism is pervasive in LDCs probably results from a combination of first-city bias and a hub-and-spoke transportation system First-city bias “First" city receives a disproportionately large share of public investment and incentives for private investment. 7

As a result, it receives a disproportionately, and inefficiently, large share of population and economic activity.

Note: The larger the ratio, the more concentrated in the capital city is the population Difficulty to block this self-sustaining process -Coordination failure and capital market failures that make the creation of new urban centers a task that markets cannot complete. -no adequate midsize cities to provide alternative locations for growth Again Chicken-and-Egg problem: no incentive to be first-mover Slum explosion as a consequence

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Slum in Rio (Brazil) Kibera slum, Nairobi, Kenya

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D-The informal sector Massive additions to the urban labor force were mainly absorbed by the informal sector – H. de Soto’s description of Lima, PeruNo legal registration, license or subject to government labor regulations

Controversial role of the informal sector Long seen as parasitic activity with little social value so treated with benign neglect at best and outright hostility at worst. Labeled as “residuum." Evolution towards recognition of the beneficial role of the informal sector, especially as appears now a permanent rather than transitional phenomenon

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1-It is closely connected with the formal urban sector: informal activities can graduate to the formal sector 2-Creation of employment and income opportunities especially allows huge numbers to escape from extreme rural poverty and underemployment: especially women 3-Creation of a surplus that could provide an impetus to growth in the urban economy. 4-Important role in the formation of human capital. 5-Absorbs semi-skilled and unskilled labor not demanded elsewhere. 6-Adopts appropriate technologies and make use of local resources. 7-Recycles waste materials. II-Consequences of migration A-Worsening of the structural imbalance: selective migration. Exacerbation of urban unemployment and underemployment. Migration is selective and therefore has implications for economic growth in general and particularly for its distributional manifestations. -young adults -mostly male(despite exception such as Philippines -women as housekeepers in Japan, Malaysia & Indonesia –widespread abuse).-educated Emigrants are often drawn from the best and the brightest. So emigration depletes the rural countryside of valuable human capital:“brain drain” This constitutes negative externalities of emigration on the community of origin. B-Who wins, who loses? Migrants Should win: expected gains from migration

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Community of origin -Difference according to skill and capital endowment -Aggregate impact depends on the balance of negative externalities and positive effect (remittances) Community of arrival -Difference according to skill and capital endowment -Except unskilled city-born previous immigrants (little political power), others benefit from the rise in unskilled labor supplies. Explains lack of motivation for governments to restrict city immigration. III-What drives LDCs migration and city growth A-How does the urban labor work? 1-Recall: how is the labor surplus absorbed from the Lewis model ----Urbanization responds to industrialization -PULL factors dominate: Accumulation was the key constraint -Migrants arrive when “called” by the industrialization process -How can we reconcile paradoxical relationship of accelerated rural-urban migration in the context of rising urban unemployment? 2-The Todaro model Hypotheses: 1-Migration is an individual rational decision 2-Migration proceeds in response to urban-rural differences in expected income rather than actual earnings Compare of expected incomes for a given time horizon in the urban sector (returns minus costs of migration) with prevailing average rural incomes in a context of a urban job lottery

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The Harris-Todaro Migration Model

Migration takes place until the expected urban wage WM is equated to the rural wage WA. The probability of getting the favored job is simply the ratio of employment in manufacturing, LM, to the total urban labor pool, LUS WA=LM/LUS[W¯M]where WA is agricultural income, LM is employment in manufacturing, LUS is total urban labor pool, and WM is the urban minimum wage.The curve qq’ indicates the agricultural wage at which the potential migrant is indifferent about employment location. So the equilibrium agricultural wage is WA and OMLA-OMLM are either unemployed or underemployed in the city.

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3-Evidence against Todaro’s job lottery model The literature on job search emphasizes the role of investment in the search and rejects the simple lottery mechanism of the job allocation rules embedded in the Todaro model: individual characteristics matter!! Rejection that wages are lower in informal service sector employment than in industrial employment. Issue of discount rates: need to assume very long time horizons, in some cases greater than 50 years for present values to equate in setting of urban wages twice as high. Cole and Sanders (1985) The model abstracts from many additional influences on the potential migrant's decision (New findings by the New Economics of Migration). B-Determinants of migration 2-Driving forces Williamson (1988) proposes 4 exogenous internal forces: 1-Malthusian pressures: high population growth in context of agricultural land scarcity: pushing labor to cities 2- Engel effects 3-Government induced urban bias: price distortions, distribution of public investment and manipulation of capital markets in favor of capital & technology intensive projects (located in cities)

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Schematic Framework for Analyzing the Rural-to-Urban Migration Decision

4-Unbalanced total factor productivity advance (i.e. more rapid in modern urban-based manufacturing sector than in the traditional rural-based primary products sectors. It seems that the combination of unbalanced TFP with price-elastic demand for urban output explains most of the city growth.

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B-Determinants of migration 3-New findings by the New Economics of Migration Migration can take place even if income at place of arrival is lower than income at place of origin Huge importance since migration will continue even if living conditions improve in the countryside Why? Relative deprivation Collective household decision driven by search for insurance and capital: anti-cyclical pattern (risk aversion and market failures are key) CONCLUSION Need to have a comprehensive Migration and Employment Strategy Observation that migration increases with rural income rise: threshold Need to account for feedback effects: population growth, informal sector, education, urban bias “New migration economics” findings point to the role of -Reduction in inequality -Implementation of insurance mechanisms (social security, old age)-Reduction of market failures in capital market

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*Create a urban-rural balance*Expand small, labor intensive industries*Eliminate factor-price distortion*Choose appropriate technologies*Modify the linkage between education and employment*Reduce population growth*Decentralize authority

A Comprehensive Migration and Employment Strategy