Chapter 7
Urbanization and Rural-Urban Migration:
Theory and Policy
Key Concepts
The chapter discusses the related problems of urbanization and migration. Key topics include:
Urbanization trends and living conditions.
The role of cities.
The Urban Giantism Problem.
The role of the informal sector of the economy.
The Todaro migration model.
Policy options for limiting rural-urban migration.
In section 7.1, Urbanization is described using data on urban population growth over the past 50 years.
Urban population growth is generally far more rapid than aggregate population growth, with about half
the urban growth accounted by migrants from the rural areas.
Section 7.2 focuses on the role of cities. Developing-country cities are growing far more rapidly than those
in the developed countries. Shantytowns and similar makeshift settlements represent over one-third of
developing country urban residents. Box 7.1 (found in this section) provides a case study on industrial
clusters in China.
Section 7.3 explains the problems this growth causes. Section 7.4 focuses on the urban informal sector.
Many developing-country urban areas have experienced dualistic development where a modern formal
sector exists alongside a large urban informal sector. Between 30% and 70% of the urban labor force works
in the informal sector. Characteristics of urban informal sector jobs include:
low skill
low productivity
self-employment
lack of complementary inputs
jobs in petty sales and services
recent migrants.
Given constraints on modern sector growth, the text argues that the informal sector should be promoted as
a major source of employment and income for the urban labor force. This sector already generates up to a
third of urban income and demand for unskilled labor, and adopts appropriate technology. An improvement
in infrastructure and credit available to this sector could generate large benefits in terms of increases in
income and jobs for the poor. But promoting this sector runs the risk of encouraging more migration,
unless more resources are devoted to the rural sector at the same time.
In section 7.5, the pros and cons of rural-urban migration are reviewed. Migration is viewed as both a symptom
and contributor to underdevelopment, much as population growth is. The Todaro migration model helps
explain why it is rational for people to continue to move to crowded cities where unemployment is high and
rising in section 7.6. The model is based on differences in expected income between the urban and rural
sector. High urban unemployment is inevitable given the large expected income differentials between the
rural and urban sectors that exist in many developing countries. Both a verbal and a diagrammatic presentation
of the model are included.
Important conclusions from the Todaro model include:
The need to reduce the urban bias of development strategies and encourage integrated rural
development. This will reduce the wage differential between the urban and rural area.
Creating urban jobs is an insufficient solution to the urban unemployment problem because more
migration is induced.
Expanding education opportunities often results in more migration.
Urban wage subsidies are counterproductive as they encourage more migration by increasing the
probability of finding a job.
Section 7.7 describes policy options for reducing migration and increasing employment that follow from
the Todaro model and include creating an appropriate rural-urban economic balance, expanding small
scale labor intensive industries, eliminating factor price distortions, choosing appropriate labor-intensive
technologies, modifying the link between education and employment, reducing population growth, and
decentralizing authority.
A mathematical formulation of the Todaro migration model is included in an appendix to the chapter.
The chapter ends with a description of migration and urbanization in India and Botswana, with most
emphasis placed on the former.
Lecture Suggestions
Students find the statistics on urbanization and the growth of the informal sector interesting. A debate on
the pros and cons of promoting the informal sector is more interesting if it comes after the discussion of
the price incentive model in Appendix 5.1 and the Todaro migration model. Some students think of urban
areas in New York or other fast-world cities (rather than a makeshift shantytown) when the term “slum” is
used. A vivid description of a shantytown will maintain student interest and make sure they understand the
very different condition of living in one of the urban areas in, say, Latin America (Rio or Sao Paulo) and
North America (New York or Washington DC). Here especially your personal experiences (along with
perhaps a PowerPoint of pictures you have taken) as well as videos of roadside stalls and other examples
of informal sector activities can make the idea of the informal sector that much more easily understood.
It would be a very good idea to begin the discussion of the Todaro Model by reviewing the Lewis model
(as is done in the text) to make clear that the assumption that all labor that transfers from agriculture is
absorbed into the formal sector is far from the case in developing countries. Simple numerical examples
can help illustrate why it is rational to migrate given high rates of urban unemployment. The Todaro model
looks at the difference between the expected urban wage, (the urban wage times the probability of finding
a job) and the rural wage. Suppose the rural wage is 30 and the urban wage is 70. If unemployment is 50%
then it is still rational for some people to migrate, depending on their level of risk aversion and other
opportunities. A main point to stress is that migration will be influenced by any policy that directly or
indirectly affects rural and/or urban absolute incomes. This is important because migration, in turn, will
affect every aspect of development. It is worth stressing that migration may reinforce urban bias.
A point worth mentioning in class, and one which relates to chapter 9, is that excessive migration imposes
external costs on the rural areas emptied of better-educated, more venturesome young people, as well as on
urban infrastructure and lost output. On average migrants seem to have slightly better prospects in the urban
areas than those who do not migrate.
A discussion of the role of remittances can be of interest to the students, particularly in relation to Mexico,
California, and Texas. Migration possibilities have a positive impact on Mexico in terms of relieving pressure
to create jobs. Migration also relieves population pressure and economic stress within Mexico. At the same
time, surveys suggest Mexicans would prefer to stay in Mexico if they could find a job. Surveys also suggest
that the most educated people migrate internally rather than internationally. The significance of remittances
for many developing economies can be illustrated by consulting the following:
http://economia.unipv.it/docs/dipeco/quad/ps/DEM/DEMWP0062.pdf. The numbers presented for gross
national disposable income are for 2011. The authors of this paper (Carla Capelli and Gianni Vaggi) are
currently working on more current data and will present their results in June of 2015.
Discussion Topics
Debate the pros and cons of promoting the informal sector. Introduce the basic facts of the informal
sector and see what ideas the students come up with for the pros and cons. You can lead them with
questions about how to improve productivity and what is the most appropriate technology.
Given the joint nature of poverty, population growth, and lack of employment faced by many developing
countries, see what kinds of solutions students can come up with to address simultaneously all three
problems. Possibilities include wage subsidies, investment credits, public works projects, credit for
small scale producers, and expanding or reforming the education system. Ask them to propose a policy
and discuss how it affects each of the 3 problems. If you are going to cover chapter 8 on education you
may wish to defer this discussion. You may also defer this discussion until after the discussion of
agriculture and the rural sector in chapter 9.
Debate the pros and cons of multinational corporation hiring practices, in relation to urban bias. In other
words should MNCs pay higher than equilibrium wages? This discussion draws on labor demand and
supply analysis as well as the price incentive model. The discussion also draws on the media attention
given to such hiring practices within the developed countries, in terms of fairness and equity. This
question can be postponed until chapter 15 when MNCs are discussed in greater detail.
Sample Questions
Short Answer
1. Suppose the rural wage is $1 per day. Urban modern sector employment can be obtained with
5 probability and pays $2 per day. Will there be any rural-urban migration? Explain your
reasoning, stating explicitly any simplifying assumptions, and show all work.
Answer: In this case the expected urban wage is equal to the rural wage. Only an individual who is
2. How could the removal of labor market distortions increase employment even if the elasticity of
factor substitution is very low?
Answer: Reduce speculative rural-urban migration based on expected wages as in the Todaro model.
3. What are the characteristics of those who migrate to urban areas? What positive and negative effects
does their leaving have on those who remain?
Answer: Younger, better educated, and probably less risk averse, given their willingness to migrate.
4. Explain why policies designed to reduce urban unemployment may not greatly reduce poverty in
developing countries.
Answer: They may lead to more migration, and may draw capital away from labor intensive rural
5. Suppose that, for example in India, a minimum wage is instituted in the modern sector above the
market clearing wage, while the rural traditional wage is market determined at a lower level than in
the modern sector.
(a) Describe the impact of this policy on the rural labor force, urban unemployment, and the rural
wage.
(b) Will the modern sector wage be equal to the traditional sector wage after markets equilibrate
through migration? Explain.
(c) What effect might moving costs have on the equilibrium you described in part (b)?
(d) What effect might the introduction of factories to rural areas have no the equilibrium you
described in part (b)?
Answer: (a) Use of the Todaro model is called for here. The rural wage will not necessarily change
despite a reduction in the rural labor force as a result of migration. The minimum wage in
the urban sector will encourage migration until the expected urban wage is equal to the
6. Discuss the importance of rural-urban migration as a source of urban population growth in various
parts of the developing world, being as specific as you can.
Answer: Discussed in the chapter.
7. Point out the main differences in job conditions and worker characteristics between the urban formal
and informal sectors.
Answer: Discussed in the chapter.
8. Explain some important policy measures that you would expect to reduce excessive rural-urban
migration. Explain.
Answer: Students may mention various types of traditional sector enrichment strategies.
9. Are developing country cities too large, too small, or about right in size? Justify your answer with
evidence from developing economies.
Answer: Too large. Cities are capital intensive, the largest cities are increasingly found in the
developing countries, and there are many urban biases causing the distortion.
10. Explain what is meant by urban bias. What are the major effects of urban bias?
Answer: Developing country policies that favor the urban sector with a disproportionate share of
investments in infrastructure, factories, buildings, and education. This creates a widening
11.Describe some of the benefits and costs associated with the emergence of large cities in developing
countries.
Answer: Benefits include the ability to learn from others that are located in close proximity, a
12. Describe some of the causes of urban giantism in developing countries.
Answer: The hub and spoke transportation system, avoiding transportation costs, location of industry
13. What are the main features of the Harris-Todaro model of rural-urban migration?
Answer: Rational economic decision based on costs/benefits. The reward to migration is expected
14. Why is urban giantism less prevalent in mature democracies?
Answer: The student is asked to draw on the political economy explanation whereby autocratic
15. Even though women may often constitute the majority of the rural-urban migrants in a country, they
usually still remain employed in the informal sector. Why? What are the consequences of this?
Answer: Men tend to dominate the formal sector therefore limiting employment opportunities
for women. This leaves women with employment in the informal sector which is usually
Multiple Choice
1. An argument supporting promotion of the urban informal sector is
(a) the formal sector is incapable of providing enough employment.
(b) informal sector workers are poorly educated.
(c) it uses a relatively high capital intensity.
(d) it would reduce urban bias.
2. Rural-urban migrants differ from the rest of the rural population in that they are more likely to be
(a) well educated
(b) poor
(c) female
(d) all of the above
3. Other things constant, the elimination of factor price distortions in developing countries would
most likely
(a) decrease rural-urban migration.
(b) have little effect on rural-urban migration.
(c) increase rural-urban migration.
(d) increase urbanization.
4. The informal sector exhibits
(a) free entry
(b) labor intensive methods
(c) small, competitive firms
(d) all of the above
5. If the rural wage is 4 and the formal urban wage rate is 10, there will be rural to urban migration if the
formal urban unemployment rate is
(a) 50%
(b) 60%
(c) 70%
(d) all of the above
6. According to the United Nations, Millennium Development Goals Report, the annual growth in % of
slum population from 1990-2001 has been the largest in:
(a) Latin America and the Caribbean
(b) South-East Asia
(c) Sub-Saharan Africa
(d) Southern Asia
7. For what percentage of urban population growth is rural-urban migration responsible?
(a) between 35% and 60%.
(b) between 40% and 80%.
(c) between 50% and 70%
(d) between 50% and 90%.
8. According to UN projections, what proportion of the world’s urban population will reside in the
urban areas of developing countries by 2025?
(a) two fifths.
(b) one half.
(c) two thirds.
(d) four fifths.