Chapter 7

Urbanization
and Rural-Urban Migration: Theory and Policy

Is migration and urbanization good or bad for development?

How can we influence and manage it?

Discussion: Is urbanization and migration good or bad for development, and how can we
influence and manage it?

Preview 7: Show the urbanization trend in your country for the past 30 years or more, and
explain whether the speed of urbanization is too fast or too slow or adequate in your country?
https://data.worldbank.org/indicator/SP.URB.TOTL.IN.ZS?view=chart
https://www.un.org/en/development/desa/population/theme/urbanization/index.asp
Table of Contents
1. Urbanization Trends
(1) Global urbanization (2) Megacities

2. Benefits and Costs of Urbanization

(1) Benefits (2) Costs (3) Consensus

3. Migration
(1) The Harris-Todaro Model (2) How to influence migration?

4. How to manage the migration?: Urban Informal Sector

(1) The role of the informal sector
(2) Transition to the formal sector

5. Case of Korea
 1. Urbanization Trends

• As a pattern of development, the more developed the economy, the

more urbanized.
- spillover effect

• But many argue developing countries are often excessively

urbanized or too-rapidly urbanizing

• This combination suggests the migration and urbanization dilemma.

 (1) Global urbanization
What propels the urbanization?

Urbanization rate by country in 2015

Growth of
manufacturing and service.
Estimated and Projected Urban and Rural Population of the More and Less Developed Regions
, 1950–2050

Less developed
Rapid urbanization
Urban bias
Rural population

More developed
Slow urbanization
Proportion of Urban Population by Region, 1950-2050

Already high urbanization in LAC.

Fast urbanization in Africa and Asia
Changes in Urban and Rural Population by Major Areas between 2011 and 2050 (in millions)
Growth of urban population

Current population 1.3b vs 4.6b

In Asia, heavy migration from the rural to the urban.

 The richer, the more urbanized, why?

Why higher urbanization in LAC?

Net International migration
: mostly to developed countries
(2) Megacities Cities with 10 Million or More Inhabitants
Megacities
2 (1970)
→ 10 (1990)
→ 23 (2011)
→ 37 (2025)

Seoul population
2 million (1959)
→ 5.4 (1970)
→ 9.2 (1983)
→ 11 (1992)
→ 10.5 (2011)
→ 9.6 (2021)
First-City Bias (favoring the largest city)

exception

Population of the Largest and

Second-Largest Cities in Selected Countries (millions)
: Seoul 9.6 m vs. Busan 3.9 m (2.46)
 Causes of the first city bias

• Import substitution industrialization: less trade, incentive to concentrate in a

single city largely to avoid transportation costs for a big demand

• Web transportation system makes transportation cost low for colonial

extraction (than Hub and spoke system)
: cf. wide spread USA (residential purpose)

• Politics: “Bread and circuses” to prevent unrest, collusion between the people
and the government (evidence: stable democracies vs. unstable dictatorships)
 Politics and Urban Concentration
Unstable politics needs large cities
Pyeongyang: 2.9 m
HamHeung: 0.78m

To be a Pyongyang citizen,
No handicapped, No law-breaker
 2. Benefits and Costs for Urbanization

(1) Benefits
less transportation and
• Agglomeration economies = communication costs
Urbanization economies (e.g. broad-band) +
Localization economies (shopping mall, linkage effects)
• Lower transaction costs: firm-to-firm, firm-to-consumer
• Firms and individuals benefit from infrastructure and urban amenities.
• Match of firms and workers. In the past, workers follow firms,
• Firms benefit from knowledge spillovers but now firms follow workers.

<Spillover Effect> MAR spillover

(1) MAR Spillovers (A. Marshall, K. Arrow, P. Romer) 1) inputs (specialized L)
When firms in the same industry are concentrated in the area 2) infrastructure
: Silicon Valley (good for knowledge exchange and innovation) 3) production
>>> Generally more important spillover in the development (outsourcing or consortium)
(2) Jacobs Spillovers (J. Jacobs) 4) marketing
When firms in the diverse industries concentrated in the area: University
 However,
city size and
Productivity
is not clear.

Except London, no relation in UK

Generally positive in USA In developing countries?

Probably even negative
because of costs.

What are the costs?

Blog post published on 24 February 2015 by Andrew Carter

 (2) Costs of urbanization
① Crimes, why?
Higher urbanization → inequality → crime rate
②Top 10 Most Traffic-Congested Cities in the World, 2017
Congestion in Bangkok

% expected percentage of more time than time without

traffic
③ Annual Growth of Urban and Slum Populations

Increasing fast in Africa

(3) Consensus: It depends on the City size

What determines the efficient Urban Scale?

Is your largest city an adequate scale?
Urbanization is good if the followings are met

• Jobs
- Demand: export-oriented policy
- Supply: competiveness (skill, low wages, …)
• Public goods such as housing, sewages, roads…
- Government has no revenue due to the informal (or unofficial) sector.

Two issues What is informal sector?

i) Should we slow down migration? If so, how?
ii) How can we manage the consequence of migration?
i.e. How to provide public goods to reduce slum?
 It also depends on the development model

• The benefit of migration depends on the development model,

i.e. on whether a migrant can have an urban job.
Benefit of Migration countries
Growth

Traditional-sector Traditional sector Not much Sri Lanka

enrichment Workers

Modern-sector Fixed # of Some migration but Latin

enrichment modern sector without job creation America

Modern-sector Constant wage, Huge migration with Korea

enlargement expansion of job creation China
modern sector (Lewis Model) Taiwan
 3. What explains Migration?

(1) The Harris-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

Why people migrate to cities despite unemployment?

Why the urban wage tends to stay higher than the rural?
Schematic Framework for Analyzing the Rural-to-Urban Migration Decision
Migration (cont’d)
If rural wage < expected urban wage,
Migration ↑ (more LUS) until they are euqal

LM Expected
qq curve WA = (WM ) Urban wage
LUS
Where
WA is agricultural income,
LM is employment in manufacturing
LUS is total urban labor pool
WM is the urban minimum wage
The Harris-Todaro Migration Model
migrate to cities despite high unemployment (not E but Z) because of higher wage

qq: locus of
D for L A D for equilibriium
LM
LM
WA = (WM )
LUS
Why higher WM?
Minimum wage
Labor union
Efficiency wage
>unemployment<
Different motivation for each type

Fast Urbanization Slow Urbanization

Urban – Rural

Urban – Urban
Rural – Rural

Rural– Urban

What determines
the rural-rural / urban-urban / urban-rural?

What is the typical migration type in your country?

(2) How to influence migration?

< Attract migration >

• More public good investment in the urban area
• More manufacturing and service investment for jobs
• More education

< Reduce migration >

• Restriction on migration (Hokou in China)
: Will it be successful? Why or why not?
• Programs of integrated rural development
: New Village Movement in Korea

If you have to reduce migration, go for balanced

growth between the rural and the urban.
 https://www.youtube.com/watch?app=desktop&v=yYE0dlh_Ixw
Migration in China
Comparison: Brazil vs. China
You can attract migration, but cannot stop it.

Migration cannot be stopped by force.

 Reducing migration: Push and Pull

Minimizing push factors: Minimize pull factor?

If the rural life is too Less investment in
tough, it will push the cities?
population.

Rural development is important Investment for cities is

when your cities are not ready necessary, and politically
to offer jobs and amenities. appealing.

Rural development is important but less emphasized,

especially when you already have high urbanization rate.
 How to manage migration in the city?

< Job creation >

• Expansion of small-scale, L intensive industries
• Eliminate factor price distortions so that employment↑
: abolish capital subsidy, adequate minimum wage, labor movement
• More vocational education

< Provision of public goods >

• Decentralization: empowering city government
• Provision of basic needs of the urban slum
• Prepare for the new “climate migrants”

What is the obstacle for the city government to provide better public goods?
4. How to Manage the Migration: The Urban Informal Sector

(1) The Role of the informal sector

Position 1: We should NOT promote informal sector.

• It may attract more people to unprepared cities aggravating problems of the slum.
• The rural area will be short of labor.
• Environment issue: more pollution, congestion …
• Illegal activities and higher crime rates
: It will lower the overall investment
• Reduce incentive to work in the formal sector
• Weak linkage effect
• Low economies of scale
• No Tax revenue for the government
• It is bad for the equality
: Gap between formal vs. informal
: No gov revenue, no redistribution
• Position 2: We should promote urban informal sector.

– Generates surplus despite hostile environment

(more than 30% of urban income)
– Creating jobs despite of low capital intensity
– 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
Importance of Informal Employment for developing countries
Consensus
• Unemployment < informal < formal sector

• We should live with the informal sector.

Instead, we should facilitate transition from
informal sector formal sector

How can we make that transition?

Why people would stay in the informal sector?
 (2) Transition to formal sector
Choice by a firm between formal vs. informal

Formal sector Informal sector

1. Legally O.K.
2. Proper protection by police?
(Sometimes need bribe)
3. Pay tax
4. Administrative red-tape
1. May be Illegal
2. Tailored protection by mafia
(Need to pay mafia)
3. No need to pay tax
4. Easy procedure for business

What is your own decision in the following examples?

Private tutoring, street vendor, small winery, … …

36
 Firm’s mobility function

Better Higher
Shift to Higher
public goods productivity in
Formal sector tax revenue
Formal sector

Public good: market-supporting institutions such as law and order,

uncorrupted public administration (exclusive for the official sector).

Vicious cycle in your country?

37
 How to decrease unofficial sector?

1. Regulation
Unofficial sector
2. Corruption
increases with
3. tax burden

- tax burden = tax rate + distrust for govt +

Tax burden ? discretion of tax administration
- distrust: Is my tax money properly used?
- discretion: unfairness, ambiguity, corruption

1. Deregulation
2. Fight against corruption
Therefore 3. Lower tax rate and less discretion
: If we lower tax rate, what will happen
to the tax revenue?

What is the situation in your country?

38
 The effect of lower tax rate on tax revenue

Tax revenue = tax rate * tax base

Lower tax rate Move to formal sector

Decrease

Increase
Tax
More Tax base
Revenue

In an economy with a large informal sector,

lower tax rate will increase tax revenue.

39
 The effect of lower tax rate on informal sector

Lower tax rate Low tax rate will directly and indirectly
decrease informal sector.

Increase in Tax revenue

Better
public goods
Decrease
Decrease

Informal
sector

40
 Policy recommendation for informal sector

Korea’s Tax administration Reform (1966) tax-GDP ratio↑ (1965: 8.7% → 1969: 14.7%)

- Low tax rate will reduce the informal economy

and also increase the tax revenue.
Low Tax rate - Recommend Non-discretionary tax scheme
s/a VAT, toll taxes, consumption tax etc
(problem: more regressive than income tax)

- Fair tax system and administration

Good public good is very important for reducing informal sector
and - Belief that the govt is providing good
Fair tax service will also decrease informal sector
administration - With good gov reputation and small informal
sector, you may maintain high tax rate.

41
5. Case of Korea: Cheonggye-cheon
(Slum along a stream in downtown Seoul)

1950s 1960s
Two Big changes Restoration of the stream
High-level Road (1971-2003, 6km)
Before and After
Conclusion
Discussion: Is urbanization and migration good or bad for development, and how can we
influence and manage it?

Urbanization and migration should either make average people’s life better or
production more efficient.

Migration should be good under the two conditions: job, public goods

Curbing migration by force is not effective.

Developing rural area is the answer.

To better manage the urbanization,

a transition from the informal to the formal sector is necessary.
And low tax rate with transparent tax administration is the key.

Case study, Review homework

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