POVERTY AND INEQUALITY The “Self-Rated Poverty Threshold” refers to the

minimum monthly income that self-rated poor

Absolute poverty "a condition characterized by families said they needed to no longer consider
severe deprivation of basic human needs, themselves “poor.” This threshold was pegged at
including food, safe drinking water, sanitation P15,000 in the past six quarters of 2023.
facilities, health, shelter, education and information.
It depends not only on income but also on access to Headcount Index – headcount taken as a fraction
services.“ of the population (N):
Headcount index = H/N
Absolute poverty means poverty defined using a
universal baseline with no reference to other
people’s income or access to goods. The failure of
meeting this baseline thus means that the individual
is poor.

UN Definition
● “Fundamentally, poverty is a denial of
choices and opportunities, a violation of
human dignity.
● It means a lack of basic capacity to
participate effectively in society.
● It means not having enough to feed and cloth
a family, not having a school or clinic to go
to, not having the land on which to grow
one’s food or a job to earn one’s living, not
having access to credit.
● It means insecurity, powerlessness and
exclusion of individuals, households and
communities.
● It means susceptibility to violence, and it
often implies living on marginal or fragile
environments, without access to clean water
or sanitation”.

MEASUREMENTS OF POVERTY Total Poverty Gap (TGP) - Measures total income

POVERTY INCIDENCE:
Headcount (H) - the number of households having
an income below the Poverty Threshold - (Poverty
Line-minimum level of income deemed adequate in
a given country).
The common international poverty line has in the
past been roughly $1 a day (1987) . In 2008, the
World Bank came out with a revised figure of $1.25
at 2005 purchasing-power parity (PPP). In October
2017, the World Bank updated the international
poverty line, a global absolute minimum, to $1.90 a
day. Now, it is 2.15 a day.
needed to raise everyone below poverty line.
Other Poverty Measurements:
Average Poverty Gap (APG) = TPG / population
Normalized Poverty Gap (NPG) = size of poverty
gap in relation to poverty line
NPG = APG / Yp
(NPG lies between 0 and 1 – unitless measure of
the gap for easier comparisons)
Average Income Shortfall (AIS) = average amount
by which the income of a poor person falls below the
poverty line
AIS = TPG / H
Normalized Income Shortfall (NIS) = AIS / Yp
HUMAN POVERTY INDEX (HPI) – (1997) MULTIDIMENSIONAL POVERTY INDEX (MPI)
A composite index measuring deprivations in the
three basic dimensions captured in the human
development index —

● a long and healthy life (probability at birth of

not surviving to age 40);
● knowledge (adult literacy rate) and;
● a decent standard of living/ overall economic
provisioning (percentage of people without
access to clean water plus percentage of
children who are underweight for their age)

THERE ARE TWO INDICES:

HPI - 1 = which measures poverty in Developing
Countries
HPI - 2 = which measures poverty in OECD-
Developed Economies.

SOCIAL PROGRESS INDEX

● measures basic human needs (assessed by
looking at nutrition and basic medical care,
water and sanitation, and shelter and
personal safety);
● foundations of wellbeing (assessed by
looking at access to basic knowledge,
access to information and communications,
health and wellbeing, and ecosystem
sustainability); and
● opportunity to progress (assessed by looking
at personal rights; personal freedom and
choice, tolerance and inclusion, and access
to advanced education)

INEQUALITY
Inequality
- the gap between rich and poor
- income inequality
- wealth disparity
- wealth and income differences
 ● The greater the Curvature of the Lorenz
Line, the greater the Relative Degree of
Inequality.

Gini Coefficient
- An aggregate numerical measure of income
inequality ranging from 0 (perfect equality)
to 1 (perfect inequality).
- It is measured graphically by dividing the
area between the perfect equality line and
the Lorenz curve by the total area lying to the
right of the equality line in a Lorenz diagram.
The higher the value of the coefficient is, the
higher the inequality of income distribution;
the lower it is, the more equal the distribution
of income

Measuring Inequality:
1. PERSONAL OR SIZE DISTRIBUTION OF
INCOME
● deals with individual persons and incomes
that they receive
○ Divide the population by QUINTILES
○ Divide the population by DECILES
○ According to ascending income levels

Typical Size Distribution of Personal Income in a

Developing Country by Income
Shares—Quintiles and Deciles

The Pietra Ratio

- (or Robin Hood Index) is a measure of
inequality in a resource distribution in a
population.
- It indicates the amount of the resource that
needs to be taken from more affluent areas
and given to the less affluent areas in order
to achieve an equal distribution (in effect to
rob from the rich to give to the poor).

Robin Hood Index - maximum vertical distance

between the Lorenz curve and the line of equal
Kuznets Ratio - Ratio of income received by the top
incomes.
20% and the bottom 40% of the population.
The value of the index approximates the share of
Lorenz Curve - a graphical representation of the
total income that has to be transferred from
cumulative distribution function of income
households above the mean to those below the
● A graph depicting the variance of the size
mean to achieve equality in the distribution of
distribution of income from perfect equality.
incomes.
Limitations of Size Distribution of Income
● The following were not considered:
● Source of income: interest, rent, profit, gift,
grant, inheritance
● Locational sources of income: urban, rural
● Occupational sources of income: agriculture,
manufacturing, commerce, services)

2. FUNCTIONAL OR FACTOR SHARE

DISTRIBUTION OF INCOME

Explains the share of total national income

that each of the factors of production
receives without regard to the ownership of
the factors.

Functional Income Distribution:

● It attempts to explain the income of a factor
of production by the contribution that this
factor makes to production. Supply and
demand curves are assumed to determine
the unit prices of each productive factor.
When these unit prices are multiplied by ARE THE REDUCTION OF POVERTY AND THE
quantities employed, we get a measure of ACCELERATION OF GROWTH IN CONFLICT?
the total payment to each factor. OR ARE THEY COMPLEMENTARY?
● For example, the supply of and demand
for labor are assumed to determine its ❖Traditionally, a body of opinion held that rapid
market wage. When this wage is then growth is bad for the poor because they would be
multiplied by the total level of employment, bypassed and marginalized by the structural
we get a measure of total wage payments, changes of modern growth.
also sometimes called the total wage bill.
❖Public expenditures required for the reduction of
The Ahluwalia-Chenery Welfare Index (ACWI) poverty would entail a reduction in the rate of
● A final approach to accounting for the growth.
distribution of income in assessing the
quality of growth is to value increases in ❖Concentrated efforts to lower poverty would slow
income for all individuals but to assign a the rate of growth paralleled the arguments that
higher weight to income gains by lower countries with lower inequality would experience
income individuals than to gains by slower growth.
higher-income individuals.
❖If there were redistribution of income or assets
POVERTY AND INEQUALITY: POLICY OPTIONS from rich to poor, even through progressive taxation,
the concern was expressed that savings would fall.
AS INTRODUCED BY GARY FIELDS, LORENZ
CURVES MAY BE USED TO ANALYZE 3 LIMITING
CASES OF DUALISTIC DEVELOPMENT:
REASONS WHY POLICIES FOCUSED TOWARD
REDUCING POVERTY LEVELS NEED NOT LEAD
TO A SLOWER RATE OF GROWTH—AND
INDEED COULD HELP TO ACCELERATE
GROWTH.
1. Widespread poverty creates conditions in
which the poor have no access to credit, are
unable to finance their children’s education,
and, in the absence of physical or monetary
investment opportunities, have many
children as a source of old-age financial
security
2. Unlike the historical experience of the now
developed countries, the rich in many
contemporary poor countries are generally
not noted for their frugality or for their desire
to save and invest substantial proportions of
their incomes in the local economy
3. The low incomes and low levels of living for
the poor, which are manifested in poor
health, nutrition, and education, can lower
their economic productivity and thereby lead
directly and indirectly to a slower-growing
economy
4. Raising the income levels of the poor will
stimulate an overall increase in the demand
for locally produced necessity products like
food and clothing, whereas the rich tend to
spend more of their additional incomes on
imported luxury goods
5. A reduction of mass poverty can stimulate
healthy economic expansion by acting as a
powerful material and psychological
incentive to widespread public participation
in the development process.
POVERTY AND GROWTH
The relationship between economic growth and
progress among the poor does not by itself
indicate causality. Some of the effect probably runs
from improved incomes, education, and health
among the poor to faster overall growth.
Moreover, poverty reduction is possible without
rapid growth.
But whatever the causality, it is clear that growth and
poverty reduction are entirely compatible objectives.
RURAL POVERTY AND WOMEN IN POreducing
VERTY
❖Majority of government expenditures in most
developing countries over the past several
decades has been directed toward the urban area
and especially toward the relatively affluent modern
manufacturing and commercial sectors.
❖Whether in the realm of directly productive
economic investments or in the fields of education,
health, housing, and other social services, this
urban modern-sector bias in government
expenditures is at the core of many of the
development problems
❖We need only point out here that in view of the
disproportionate number of the very poor who reside
in rural areas, any policy designed to alleviate
poverty must necessarily be directed to a large
extent toward rural development in general and the
agricultural sector in particular
❖Women and children are more likely to be poor
and malnourished and less likely to receive
medical services, clean water, sanitation, and other
benefits;
❖A disproportionate number of the ultrapoor live in
households headed by women, in which there are
generally no male wage earners; less access to
education, formal sector employment, social
security, and government employment programs
(gender bias).
ECONOMIC POLICIES THAT GOVERNMENTS IN
DEVELOPING COUNTRIES ADOPT TO REDUCE
POVERTY & INEQUALITY WHILE MAINTAINING
AND/OR ACCELERATING ECONOMIC GROWTH
RATES?
AREAS OF INTERVENTION
ALTERING THE FUNCTIONAL DISTRIBUTION
- the returns to labor, land, and capital as
determined by factor prices, utilization
levels, and the consequent shares of
national income that accrue to the owners
of each factor
 - Altering the Functional Distribution of
Income through Relative Factor Prices
- the power of trade unions to raise
minimum wages to artificially high
levels (higher than those that would
result from supply and demand) even
in the face of widespread
unemployment is often cited as an
example of the “distorted” price of
labor. From this it is argued that
measures designed to reduce the
price of labor relative to capital (e.g.,
through market-determined wages in
the public sector or public wage
subsidies to employers) will cause
employers to substitute labor for
capital in their production activities.
Such factor substitution increases
the overall level of employment and
ultimately raises the incomes of the
poor, who have been excluded from
modern-sector employment and
typically possess only their labor
services.
- Removal of such factor-price
distortions would therefore go a long
way toward combining more growth,
efficiently generated, with higher
employment, less poverty, and
greater equality.
MITIGATING THE SIZE DISTRIBUTION
- the functional income distribution of an
economy translated into a size distribution
by knowledge of how ownership and
control over productive assets and labor
skills are concentrated and distributed
throughout the population.
- The distribution of these asset holdings and
skill endowments ultimately determines the
distribution of personal income
- Redistribution policies - Policies geared to
reducing income inequality and expanding
economic opportunities in order to promote
development, including income tax policies,
rural development policies, and publicly
financed services. (e.g. land reform).
MODERATING (REDUCING) THE SIZE
DISTRIBUTION AT THE UPPER LEVELS
- through progressive taxation of personal
income and wealth. Such taxation increases
government revenues that decrease the
share of disposable income of the very
rich—revenues that can, with good policies,
be invested in human capital and rural
and other lagging infrastructure needs,
thereby promoting inclusive growth.
- In reality, in many developing countries (and
some developed countries), the gap
between what is supposed to be a
progressive tax structure and what
different income groups actually pay can
be substantial.
- Progressive tax structures on paper often
turn out to be regressive taxes in
practice, in that the lower and
middle-income groups often end up
paying a proportionally larger share of
their incomes in taxes than the
upper-income groups. The reasons for this
are simple. The poor are often taxed at the
source of their incomes or expenditures
(by withholding taxes from wages, general
poll taxes, or indirect taxes levied on the
retail purchase of goods such as cigarettes
and beer). By contrast, the rich derive by far
the largest part of their incomes from the
return on physical and financial assets,
which often go unreported.
MODERATING (INCREASING) THE SIZE
DISTRIBUTION AT THE LOWER LEVELS
- through public expenditures of tax
revenues to raise the incomes of the poor
either directly (e.g., by conditional or
unconditional cash transfers) or indirectly
(e.g., through public employment creation
such as local infrastructure projects or the
provision of primary education and health
care).
- Such public policies raise the real income
levels of the poor above what their personal
income levels would otherwise be and can
do so sustainably when they build the
capabilities and assets of people living in
poverty.
DIRECT TRANSFERS AND SUBSIDIES CAN BE
HIGHLY EFFECTIVE, BUT THEY NEED TO BE
DESIGNED CAREFULLY.
SIGNIFICANT PROBLEMS REQUIRE
ATTENTION:
1. When resources for attacking poverty are
limited—as they always are—they need to
be directed to people who are genuinely
poor.
2. It is important that beneficiaries not become
unduly dependent on the poverty program; in
particular, we do not want to give the poor
less incentive to build the assets, such as
education, that can enable them to stay out
of poverty. But a “safety net” can also be
valuable to encourage the poor to accept
a more entrepreneurial attitude toward
their microenterprises. This is much more
possible when the poor do not fear that their
children will suffer terrible consequences if
their small businesses fail.
3. We do not want to divert people who are
productively engaged in alternative
economic activities to participate in the
poverty program instead.
4. Poverty policies are often limited by
resentment from the nonpoor, including
those who are working hard but are not very
far above the poverty line themselves.
POVERTY TARGETING
- USE OF POLICY INSTRUMENTS TO
CHANNEL RESOURCES TO A TARGET
GROUP IDENTIFIED BELOW AN AGREED
NATIONAL POVERTY LINE (ADB)
- When a subsidy of goods consumed
by the poor is planned, it should be
targeted to the geographic areas
where the poor are found and should
emphasize goods that nonpoor
people do not consume. This helps
conserve resources for the
program and minimizes efforts by
non poor people to benefit from
the program.
- It may be useful to impose a work
requirement before food aid is
provided (Workfare program- A
poverty alleviation program that
requires program beneficiaries to
work in exchange for benefits, as
in a food-for-work program)
- The high work requirement and very
modest payment discourage the
nonpoor from participating, thus
conserving resources. This
characteristic is known as the
“screening” function of workfare
programs. These requirements also
help preserve the program’s political
sustainability: When people see that
the poor are getting “a hand up rather
than a handout,” the programs tend
to attract wider public support.
POPULATION GROWTH
World Population
- There is a relationship between annual
percentage increases and the time it takes
for a population to double in size.
Estimated World Population
Doubling Time
- Period that a given population or other
quantity takes to increase by its present size.
- Before 1650, it took nearly 36,000 years, or
about 1,400 generations for the world
population to double. Today it would take
about 58 years, or two generations, for the
world population to double at current rates.
- Manila, the capital of the Philippines, ranks
number one on this list. It is home to 46, 178
people per sq. km.
- The fertility rate in the city is soaring at 3.1
children per woman.
- The living standards in the city also vary
widely with the wealthy living in highrises and
 large homes to the poorest inhabiting
crowded makeshift communities.
- Another huge issue threatening lives in
Manila is the fact that it is located on the
Pacific Ring of Fire. It is highly prone to
earthquakes and a greater loss of lives in
such disasters due to the densely packed
population.
Structure of World Population
Fertility and Mortality Trends
Natural Increase:
- The difference between the birth rate and the
death rate of a given population.
Total Fertility Rate (TFR)
- The number of children that would be born to
a woman if she were to live to the end of her
childbearing years and bear children in
accordance with the prevailing age-specific
fertility rates.
Life Expectancy at Birth
- The number of years a newborn child would
live if subjected to the mortality risks
prevailing for the population at the time of
child's birth.
Under-5 Mortality Rate
- Deaths among children between birth and 5
years of age per 1,000 live births.
Demographic Divide
Age Structure and Dependency Burdens
- Population is relatively youthful in the
Developing World.
Youth Dependency Ratio
- The proportion of young people under
age 15 to the working population
aged 16 to 64 in a country.
- The workforce in developing
countries must support almost twice
as many children as it does in the
wealthier countries.
- In more developed countries are
plagued with their low population
growth and old-age dependents (over
age 65)
Hidden Momentum of Population Growth
- In general, the more rapid the population
growth rate is, the greater the proportion of
dependent children in the total population
and the more difficult it is for people who are
working to support those who are not.
- The phenomenon whereby population
continues to increase even after a fall in birth
rates because the large existing youthful
population expands the population’s base of
potential parents.
Population Pyramid
- Every year that passes without a reduction in
fertility means a larger multiple of the present
total population size before it can eventually
level off.
Demographic Dividend
- A period in which there are fewer children to
support, a larger fraction of women join or
remain in the workforce for a longer period of
time, and there are more available resources
to invest in human capital.
Demographic Transition
- Attempts to explain why all contemporary
developed nations have more or less passed
through the same three stages of modern
population history. Before their economic
modernization, these countries for centuries
had stable or very slow growing populations
as a result of a combination of high rates and
almost equally high death rates.
- The process by which fertility rate eventually
declines to replacement levels.
Replacement Fertility
- The number of births per woman that would
result in stable population levels.
Causes of High Fertility in LCDS:
Malthusian Population Trap
- Drawing on the concept of diminishing
returns, Malthus postulated a universal
tendency for the population of a country,
unless checked by dwindling food supplies,
to grow at a geometric rate, doubling every
30 to 40 years. At the same time, because of
diminishing returns to the fixed factor, land,
food supplies could expand only at a roughly
arithmetic rate.
Criticisms of the Matlhusian Model:
Impact of Technological Progress
- The model ignores the enormous impact of
technological progress in offsetting the
growth-inhibiting forces of rapid population
increase.
No correlation between population growth and
levels of per capita income
- The trap focuses on its assumption that
national rates of population increase are
directly (positively) related to the level of
national per capita income at relatively low
levels of per capita income, we should
expect to find population growth rates
increasing with increasing per capita income.
Microeconomics Household Theory of Fertility
- Shows determinants of family fertility.
- The theory that family formation has costs
and benefits that determine the size of
families formed.
The demand for children in Developing
Countries
- First two or three as “consumer goods”.
- Additional children as “investment goods”
URBANIZATION
- The economic and demographic growth of
the urban centers.
HIC (per capita income)
- Are among the most urbanized, and poorest
countries are among the least urbanized.
- The greater share of population in urban
areas BUT today’s LCDs are far more
urbanized than today’s MCDs when they
were at a comparable level of development
(income per capita).
Changes in Urban and Rural Population by Major
Areas between 2011 and 2050 (in millions)
- Urbanization rates increase whenever
urban population growth exceeds rural
population growth.
- United Nations projects that Asia and
Africa will account for some 86% of
the global urban population increase
in this period.
Relationship between Urbanization and Per
Capita GDP, 2010 with Comparison to
Relationship in 1960:
- There is positive association between
urbanization and per capita income
- Generally, the more developed the
country, measured by per capita
income, the greater the share of
population living in urban areas.
- The black linear fit line shows
urbanization versus the log of 2010
GNI per capita; the highest-income
countries, such as Japan, are also
among the most urbanized, while the
very poorest countries, such as
Burundi, are among the least
urbanized.
- At the same time, while individual
countries become more urbanized as
they develop, today’s poorest
countries are far more urbanized than
today’s developed countries were
when they were at a comparable
level of development, as measured
by income per capita.
- The dashed blue linear fit line shows
the relationship between income per
capita and urbanization that prevailed
in 1960.
 - A comparison of the two lines reveals
that for any given income in 2010, a
country that had the identical income
in 1960 was significantly less
urbanized.
Proportion of Urban Population by Region,
1970–1995
- In recent decades urbanization has
continued in nearly all developing
countries, even those that have
experienced only minimal
industrialization.
- The figure can be interpreted as:
- Urbanization is closely associated
with economic growth.
- Urbanization is occurring everywhere,
at high and low levels of income and
whether growth is positive or
negative.
City
- an area with relatively high population
density that contains a set of closely related
activities
- population density – population/land area
Firms often also prefer to be located where
they can learn from other firms doing similar
work.
- Learning takes place in both formal
relationships, such as joint ventures, and
informal ones, such as from tips learned in
evening social clubs or over lunch.
- These spillovers are also agglomeration
economies, part of the benefits of what
Alfred Marshall called “industrial districts.
Megacities: Cities with 10 Million or More
Inhabitant
- A megacity is pegged as any city with
more than 10 million residents.
- Another term often used to describe
this is conurbation, a somewhat more
comprehensive label that
incorporates agglomeration areas.
- Of the 30 biggest megacities
worldwide, 20 of them are in Asia and
South America alone, including
Baghdad, Bangkok, Buenos Aires,
Delhi, Dhaka, Istanbul, Jakarta,
Karachi, Kolkata, Manila, Mexico City,
Mumbai, Osaka-Kobe-Kyoto, Rio de
Janeiro, Sao Paulo, Seoul, Shanghai,
Teheran, and Tokyo-Yokohama.
- European megacities include London
and Paris, and the UN estimates that
the number of megacities worldwide
will only increase.
Global City
- Tracing back to 1886, its first recorded use
described the English port of Liverpool’ s
involvement in global trade. Now crucial to
the modern idea of globalization, ‘ global city
’ as a term was popularized by Saskia
Sassen in 1991 with the cities of London,
Tokyo and New York serving as the prime
examples. These cities are key locations
within the world economy, acting as crucial
centers for the global trading of goods and
services.
Metropolis
- A metropolis, from the Greek for ‘ mother city
’ , was initially the places from which settlers
were sent to discover, and colonize other
areas. It has since developed into a
descriptive term for large cities that are key
centers of national and regional
socioeconomic activity, sharing many of the
same characteristics with a global city.
Megacity
- Much less subjective, a ‘ megacity ’ has been
used to describe cities with over a certain
amount of inhabitants. The term was first
documented by the University of Texas in
1904. Seemingly clear-cut, the definition has
some ambiguity, as different organizations
suggest different criteria. A city with over 10
million inhabitants is the most widely
accepted definition; however, others include
urban areas with only 8 million people and
also with a population density of 2000 per
square kilometer as a megacity.
Megalopolis
- A cluster of well-networked cities is called a
megalopolis, a term first used in the early
20th century. These can occur for a variety of
reasons since certain areas tend to attract
more growth than others. Geography can
play a large role in the location of
megalopolises, as can good international
and regional transport links. The subsequent
 economic growth of one city can have a
positive impact on neighboring locations.
Estimated and Projected Urban and Rural
Population of the More and Less Developed
Regions, 1950–2050
- In principle, a megacity could offer large
agglomeration economies, although
congestion costs may rise rapidly.
Agglomeration economies are the benefits that
come when firms and people locate near one
another together in cities and industrial clusters.
- Another potential downside is that
megacities tend to be more capital intensive,
which does not match with the comparative
advantage of most developing countries.
Megacities, particularly in low-income
countries, may also have outsized social and
health problems. The relative balance of
these factors is likely to differ across
countries depending on the forces that led
these cities to reach their megascales.
Role of Cities:
Cities are formed because they provide cost
advantages to producers and consumers through
what are called agglomeration economies.
Walter Isard : these agglomeration economies
come in two forms
Urbanization economies - effects associated with
the general growth of a concentrated geographic
region.
Localization economies - effects captured by
particular sectors of the economy, such as finance or
automobiles, as they grow within an area.
Localization economies often take the form of
backward and forward linkages:
- Forward linkage: When transportation costs
are significant, users of the outputs of an
industry may benefit from a nearby location
to save on these costs.
- Backward linkage: firms of the same or
related industries may benefit from being
located in the same city, so they can all draw
on a large pool of workers with the specific
skills used in that sector or from specialized
infrastructure.
- A central question related to the
unprecedented size of these urban
agglomerations is how these cities will
cope—economically, environmentally,and
politically— with such high and rapidly rising
concentrations of people.
What causes the explosion of urban poor?
- Population growth
- Rural-urban migration - The movement of
people from rural villages, towns, and farms
to urban centers (cities) in search of jobs
- Urban bias - The notion that most
governments in developing countries favor
the urban sector in their development
policies, thereby creating a widening gap
between the urban and rural economies.
- A form of urban bias that has often
caused considerable distortions might
be termed first-city bias. The
country’s largest or first (“first-place”)
city receives a disproportionately
large share of public investment and
incentives for private investment in
relation to the country’s
second-largest city and other smaller
cities. As a result, the first city
receives a disproportionately—and
inefficiently— large share of
population and economic activity.
A critical issue that needs to be addressed is the
extent to which national governments can
formulate development policies that can have a
definite impact on trends in and the character of
urban growth.
Congestion Costs
- The higher the urban density, the higher the
costs of real estate. Workers may find
themselves with longer and longer
commutes and greater transportation costs
and may demand higher wages to cover
these costs. Costs of infrastructure such as
water and sewer systems are higher too.
- In theory, if costs of transportation of finished
goods are high and consumers wish to be
located in the largest city to avoid paying
those transportation costs as much as
possible, economic activity could become
indefinitely concentrated within a city (called
 the “black hole” effect), but it is generally
much less costly to improve the
transportation system of a country than to
pay the costs of maintaining a gargantuan
urban complex.
On Congestion Costs
Efficient Urban Scale
- Under competitive forces, and other things
being equal, if workers are mobile, a worker
in a large city with higher wages but higher
costs of living (such as higher housing
prices) is no better off in real material terms
than a worker with comparable education,
experience, ability, and health in a small city
who has lower wages and lower costs of
living.
- Thus, the concentrating, or “centripetal,”
forces of urban agglomeration economies
are opposed by the dispersing, or
“centrifugal,” forces of diseconomies
featuring increasing costs with greater
concentration, because some of the factors
of production, most obviously land, are not
mobile. We can “create” more central city
land by building skyscrapers, but only to a
certain scale and only at substantial cost.
Thus, it is normal for an economy to have a
range of cities, with sizes dependent on the
scale of the industries it sponsors and the
extent of agglomeration economies found for
that industry or cluster of industries.
Two well-known theories of city size:
- The urban hierarchy model (Central Place
Theory) by August Losch and Walter
Christaller
- plants in various industries have a
characteristic market radius that
results from the interplay of three
factors:
1. economies of scale in production
2. transportation costs, and
3. the way the demand for land is
spread over space
The larger the economies of scale in
production and the lower the
transportation costs, the larger the
radius of territory that will be served
by that industry to minimize costs.
When countries have different
specializations in the inter national
market or are at different stages of
economic development, the size
distribution of cities may potentially
differ
- The differentiated plane model by Alfred
Weber, Walter Isard, and Leon Moses
- the limited number of transportation
routes linking the industries within an
economy plays a key role. The model
predicts urban concentrations at the
points where the scarce
transportation routes cross, called
“internal nodes.” The hierarchy of
urban sizes depends on the pattern
of nodes and the industrial mix. e.g.
Primary processing industries have
few inputs and are usually located
near the source of the primary
resource.
Urban Gigantism
- Overall, urban giantism probably results from
a combination of a hub-and-spoke
transportation system and the location of the
political capital in the largest city.
- In the case of developing countries, the main
transportation routes are often a legacy of
colonialism. Theorists of the dependence
school have compared colonial
transportation networks to drainage systems,
emphasizing ease of extraction of the
country’s natural resources. In many cases,
the capital city will be located near the outlet
of this system on the seacoast. This type of
transportation system is also called a
“hub-and-spoke system, ” which is
especially visible when the capital city is
located in the interior of the country
- Sometimes one urban core becomes too
large to keep the costs of the industries
located there to a minimum.
- In developed countries, other cores are often
developed within the broad metropolitan
region, enabling the region as a whole to
continue to receive benefits of agglomeration
while lowering some of the costs; or new
cities may develop in entirely different parts
of the country.
 The Urban Informal Sector unemployment and underemployment,
- The dualistic analysis of traditional hence lessens the validity of the Lewis
and modern sector has also been two-sector model of development
applied specifically to the urban .
economy, which has been Todaro migration model
decomposed into a formal and an - A theory that explains rural-urban migration
informal sector. as an economically rational process despite
- Informal sector The part of high urban unemployment.
the urban economy of - Migrants calculate (present value of) urban
developing countries expected income (or its equivalent) and
characterized by small move if this exceeds average rural income.
competitive individual or Harris-Todaro model
family firms, petty retail trade - An equilibrium version of the Todaro
and services, labor-intensive migration model that predicts that expected
methods, free entry, and incomes will be equated across rural and
market determined factor and urban sectors when taking into account
product prices The existence informal-sector activities and outright
of an unorganized, unemployment.
unregulated, and mostly legal CRITICISMS:
but unregistered informal Induced migration
sector was recognized in the - Process in which the creation of urban jobs
1970s, following observations raises expected incomes and induces more
in several developing people to migrate from rural areas
countries that massive
additions to the urban labor
force failed to show up in
formal modern-sector
unemployment statistics. It
allows excess labor to escape
from extreme rural poverty
and underemployment,
although under living and
working conditions and for
incomes that are often not
much better.
Disadvantages of Urban Informal Sector:
1. The strong relationship between rural-urban
migration and labor absorption in the
informal sector
2. pollution and congestion

- In the case of the US and Europe,

Urbanization and industrialization were in
essence synonymous. This historical model
served as a blueprint for structural change in
developing countries, as evidenced, for
example, by the original Lewis theory of
labor transfer. But this is nont the case for
developing countries the past decades as
RU migration increased levels of urban