Chapter 7

Urbanization
and Rural-Urban
Migration:
Theory and
Policy
 Urbanization

•Urbanization: Increase in the proportion of a country's

population living in urban areas.

•Global and Indian Context:

•Global Trends: By 2050, ~68% of the world’s population will
live in urban areas.
•India:
•Urban population was 31.2% in 2011 (Census 2011),
projected to reach ~40% by 2030

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 7.1 Urbanization: Trends and
Living Conditions
• As a pattern of development, the more
developed the economy, the more
urbanized
• But many argue that developing
countries are often too-rapidly urbanizing
• WHY?

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 Figure 7.1 Changes in Urban and Rural
Population by Major Areas between 2011 and
2050 (in millions)

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 Relationship Between Economic
Development and Urbanization
• Historical Evidence: In developed countries,
urbanization followed gradual industrialization,
creating a balanced infrastructure to accommodate
urban growth

• Contemporary Evidence in Developing

Countries: Developing nations are urbanizing
rapidly, but this process often outpaces economic
growth, leading to issues like slums and inadequate
infrastructure

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 Figure 7.4 Megacities: Cities with 10
Million or More Inhabitants

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 Figure 7.7 Annual Growth of Urban
and Slum Populations, 1990–2001

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 7.2 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)

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 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

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 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

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 7.3 The Urban Giantism Problem

• There may be general urban bias

• A “Giant” city often becomes a national hub for

finance, industry, culture, and governance, which
leads to the marginalization of smaller cities and
rural areas

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 7.3 The Urban Giantism Problem

• There may be First-City Bias (favoring largest city)

• Causes of Urban Giantism:

– Historical Legacy
– Economic pull factors
– “Bread and circuses”
– Hub and spoke transportation system
Compounding effect of locating the national
capital in the largest city

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 Table 7.1 Population of the Largest and
Second-Largest Cities in Selected Countries
(millions)

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 7.4 The Urban Informal Sector

• Why promote the urban informal

sector?
– Generates surplus despite hostile environment
– Creating jobs due to low capital intensity
– Access to (informal) training and apprenticeships
– Creates demand for less or unskilled workers
– Uses local technologies, local resources
– Recycling of waste materials
– More benefits to the poor, especially women who
are concentrated in the informal sector

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 7.4 The Urban Informal Sector

•Supportive policies for informal workers

•Skill development for informal sector workers

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 7.5 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

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 Push-Pull Theory of Migration

Push Factors

Pull Factors

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 The Lewis Model (Dual Sector
Model)
• The Lewis Model is a classical development
theory that explains rural-to-urban migration
as part of the process of economic
development.

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 Figure 7.12 The Harris-Todaro Migration
Model

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 7.6 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

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 7.6 Toward an Economic Theory of
Rural-Urban Migration (cont’d)

Where
WA is agricultural income,
LM is employment in manufacturing
LUS is total urban labor pool
WM is the urban minimum wage

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 7.6 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
– Programs of integrated rural development
should be encouraged

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 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!

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 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.

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 7.7 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

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 Concepts for Review

• Agglomeration economies • Present value

• Congestion • Rural-urban migration
• Efficiency wage • Social capital
• Harris-Todaro model • Todaro migration model
• Induced migration • Urban bias
• Informal sector • Urbanization economies
• Labor turnover • Wage subsidy
• Localization economies

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