Economic Development 2024/2025 PDF

Economic Development 2024 / 2025 Part One (Principles & Concepts) 1. Introducing Economic Development: A Global Perspective What is the meaning of growth if it is not translated into the lives of people? United Nations Development Program, Human...

Economic Development 2024 / 2025 Part One (Principles & Concepts) 1. Introducing Economic Development: A Global Perspective What is the meaning of growth if it is not translated into the lives of people? United Nations Development Program, Human Development Report, 1995 People throughout the world live under very different circumstances (e.g., shelter, food supply, health, financial security, education).  According to the FAO, between 691 and 783 million people faced hunger in 2022.  According to the WHO, in 2022 at least 1.8 billion people use a contaminated drinking-water source. Contaminated drinking-water is estimated to cause 502000 deaths each year.  According to UNICEF, in 2023 over 600 million children worldwide are unable to attain minimum proficiency levels in reading and mathematics, even though two thirds of them are in school. Various questions could be raised here such as:  Do the needs of people living in poverty extend beyond increased income? (Is there a difference between higher income and development?)  Why does affluence coexist with dire poverty, not only on different continents, but also within the same country or even the same city?  Can traditional, low-productivity, subsistence societies be transformed into modern, high-productivity, high-income nations?  To what extent are the development aspirations of poor nations helped or hindered by the economic activities of rich nations? These and many other questions concerning international and national differences in standards of living, in areas including health and nutrition, education, employment, environmental sustainability, population growth, and life expectancies fall within the scope of Economic Development or Development Economics as a branch of economic study. The study of economic development is one of the newest branches of the broader disciplines of economics and political economy. The systematic study of economic development in developing countries has emerged only over the past five decades.  The Nature of Development Economics  Traditional Economics is concerned with the efficient allocation of scarce resources, utility calculation, profit maximization, equilibrium outcomes, rationality…  Political economy views economic activity in its political context and focuses on the role of power in economic decision making (how certain groups of elites influence the allocation of scarce resources).  Development Economics, in addition to being concerned with the efficient allocation of scarce resources and with their sustained growth over time, has an ultimate purpose to help us understand the economic, social, political, and institutional mechanisms, both public and private, necessary to bring about rapid and large-scale improvements in levels of living for the peoples of developing economies to help improve the material lives of most of the global population. What are the developing economies? (Topic 2)  What Do We Mean by Development?  Traditional Economic Measures: Development (the overall economic wellbeing of a population) has meant achieving sustainable rates of growth of per capita income (real per capita GNI) or increased output (GDP).  The New Economic View of Development: During the 1970s, economic development came to be redefined in terms of the reduction or elimination of poverty, inequality, and unemployment within the context of a growing economy. More generally, development is a multidimensional process where populations move away from a condition of life perceived as unsatisfactory toward a better condition of life.  What Do We Mean by Development?  Amartya Sen’s “Capability” Approach: Sen argues that poverty cannot be properly measured by income or even by utility; what matters fundamentally is not the things a person has but what a person is, or can be, and does, or can do (Capability). What matters for well-being is not just the characteristics of commodities consumed, as in the utility approach, but what use the consumer can and does make of commodities. For example, a book is of little value to an illiterate person. we need to think beyond the availability of commodities and consider their use: to address what Sen calls functionings, that is, what a person does (or can do) with the commodities of given characteristics that they come to possess or control.  What Do We Mean by Development? Sen defines capabilities as “the freedom that a person has in terms of the choice of functionings, given his personal features (conversion of characteristics into functionings) and his command over commodities.” Sen’s perspective helps explain why development economists have placed so much emphasis on health and education. Real income is essential, but to convert the characteristics of commodities into functionings, in most important cases, surely requires health and education as well as income. Sen identifies five sources of disparity between (measured) real incomes and well- being which are: personal heterogeneities, environmental diversities, variations in social climate, distribution within the family, and differences in relational perspectives.  What Do We Mean by Development?  Three Core Values of Development: At least three basic components or core values serve as a conceptual basis and practical guideline for understanding the inner meaning of development. These core values are sustenance, self-esteem, and freedom. 1. Sustenance is the ability to meet basic needs (i.e., food, shelter, health, protection) that are necessary to sustain an average human being at the minimum level of living. When any of these is absent or in critically short supply, a condition of “absolute underdevelopment” exists. 2. Self-esteem is a sense of worth and self-respect, of not being used as a tool by others for their own ends. 3. Freedom is a situation in which a society has at its disposal a variety of alternatives from which to satisfy its wants and individuals enjoy real choices according to their preferences.  What Do We Mean by Development? Therefore, development in all societies must have at least the following three objectives: 1. To increase the availability and widen the distribution of basic life-sustaining goods such as food, shelter, health, and protection 2. To raise levels of living, including, in addition to higher incomes, the provision of more jobs, better education…etc., which will serve not only to enhance material wellbeing but also to generate greater individual and national self-esteem 3. To expand the range of economic and social choices available to individuals and nations by freeing them from servitude and dependence.  Global Perspective of Economic Development: Sustainable Development Goals (SDGs) In September 2000, the 189 member countries of the United Nations at that time adopted eight Millennium Development Goals (MDGs), each assigned specific targets, committing themselves to making substantial progress toward the eradication of poverty and achieving other human development goals by 2015. The eight goals were: to eradicate extreme poverty and hunger; achieve universal primary education; promote gender equality and empower women; reduce child mortality; improve maternal health; combat HIV/AIDS, malaria, and other diseases; ensure environmental sustainability; and develop a global partnership for development.  Global Perspective of Economic Development: Sustainable Development Goals (SDGs) Though debatable, the final UN MDG report indicates that all the goals were achieved although to varying degrees in the respective regions of the world. Despite these gains, the report details uneven progress across regions and countries which resulted in gaps in achieving some of the MDG targets, especially for the poorest and those disadvantaged because of their sex, age, disability or geographic location. At the end of the MDG period, world leaders committed to build upon their achievements on the 8 MDGs by pursuing 17 Sustainable Development Goals (SDGs) (with 169 targets) to be achieved by 2030 in all countries. Sustainable Development Goals (SDGs) SDG status at the midpoint of the 2030 Agenda using population- weighted world average performance by goal VNRs submitted by Egypt in 2016, 2018 and 2021.  Conclusion  Development economics is a distinct yet very important extension of both traditional economics and political economy.  Development may mean different things to different people.  The SDGs reflect the global perspective on economic development. According to the sustainable development report (2023), all UN Member States should adopt long-term sustainable development pathways that provide a stepwise and medium- to long-term approach to guide their sustainable development policies, not only to 2030 but to 2050!  References  Todaro, M. P. and Smith, C. S. Economic Development. Twelfth Edition, Pearson Addison-Wesley, 2015. (Chapter One)  Sachs, J.D., Lafortune, G., Fuller, G., Drumm, E. (2023). Implementing the SDG Stimulus. Sustainable Development Report 2023. Paris: SDSN, Dublin: Dublin University Press, 2023. 10.25546/102924 Economic Development 2024 / 2025 Part One (Principles & Concepts) 2. Comparative Economic Development In the words of a poet, “There will be only one future—or none at all.” The developing world has made substantial economic development progress in recent years. But the most striking feature of the global economy remains its extreme contrasts. Examples: Output per worker in the United States is more than 50 times higher than in the Democratic Republic of Congo (DRC), life expectancy is 79 in the US and just 48 in the DRC, almost all women are literate in the United States while just 57% are in the DRC. The future development of the developing nations should be a major concern of all nations. There can no longer be two futures, one for the few rich and the other for the very many poor. In this topic, we focus on:  What are Developing countries and how development is measured to allow for quantitative comparisons across countries?  The 10 important features that developing countries tend to have in common, on average, in comparison with the developed world. Behind these commonalities are very substantial differences among developing countries.  In addition to the commonalities and differences among developing countries, we further consider key differences between conditions in today’s developing countries and those in now developed countries at an early stage of their development, and we examine the controversy over whether developing and developed countries are now converging in their levels of development.  Defining the Developing World  The most common way to define the developing world is by per capita income (GNI per capita). (e.g., several international agencies, including the Organization for Economic Cooperation and Development (OECD), the United Nations and the World Bank). In the World Bank’s classification system, 213 economies are classified as low-income countries (LICs), lower-middle-income countries (LMCs), upper-middle- income countries (UMCs), high-income OECD countries, and other high-income countries. The developing countries are those with low-, lower-middle, or upper-middle incomes. https://datatopics.worldbank.org/world-development-indicators/the-world-by- income-and-region.html  Defining the Developing World  Nevertheless, the characterization of the developing world as sub-Saharan Africa, North Africa and the Middle East, Asia (except for Japan and, more recently South Korea and perhaps two or three other high-income economies), Latin America and the Caribbean, and the “transition” countries of eastern Europe and Central Asia including the former Soviet Union, remains a useful generalization. In contrast, the developed world constituting the core of the high-income OECD is largely comprised of the countries of western Europe, North America, Japan, Australia, and New Zealand.  Sometimes a special distinction is made among upper-middle-income or newly high- income economies, designating some that have achieved relatively advanced manufacturing sectors as newly industrializing countries (NICs).  Defining the Developing World  Yet another way the WB classifies the nations of the developing world is through their degree of international indebtedness (severely, moderately, and less indebted).  The United Nations Development Programme (UNDP) classifies countries according to their level of human development, including health and education attainments as low, medium, high, and very high.  Another widely used classification by the UN is that of the least developed countries, where a country must meet each of three criteria: low income, low human capital, and high economic vulnerability (how is economic vulnerability measured? EVI).  Finally, the term emerging markets was introduced at the International Finance Corporation (more in finance than development contexts).  Basic Indicators of Development (To allow for quantitative comparisons across countries)  In accordance with the World Bank’s income-based country classification scheme, the first indicator is real income or GNI per capita adjusted for purchasing power: Researchers compare relative GNIs and GDPs by using purchasing power parity (PPP) to measure living standards more accurately (through a “basket of goods” approach). If domestic prices are lower, PPP measures of GNI per capita will be higher than estimates using foreign exchange rates as the conversion factor. Overall, the average real (PPP) income per capita in high-income countries is more than 28 times that in low-income countries and more than 5 times higher than in middle-income countries.  Basic Indicators of Development  Indicators of Health and Education: In line with Sen’s Capability approach, it is necessary to evaluate a nation’s average health and educational attainments (besides average income) to reflect core capabilities. Health indicators include under-5 mortality rate, life expectancy, and the prevalence of malnutrition (% underweight of children under Age 5). Education indicators include primary completion rate (as % of relevant age group) and literacy rate. In addition to big differences across different country groupings in health and education indicators, the low-income countries are themselves a very diverse group. Look at Table 2.2 (p. 49) and Table 2.3 (p. 50).  Basic Indicators of Development  Holistic Measures of Living Levels and Capabilities: The most widely used holistic development measure is the new Human Development Index (HDI) presented by the UNDP in the Human Development Reports to allow nations to take a broader measure of their development performance. The New HDI ranks each country on a scale of 0 (lowest human development) to 1 (highest human development) based on three goals of development: a long and healthy life as measured by life expectancy at birth; knowledge as measured by a combination of average schooling attained by adults and expected years of schooling for school-age children; and a decent standard of living as measured by real per capita gross domestic product adjusted for the differing purchasing power parity. How is the new HDI calculated?  Basic Indicators of Development Table 2.4 (p. 55) Income predicts rather weakly how countries will perform on education and health, or on the New HDI. Based on the New HDI 2013, some countries perform more poorly on the New HDI than would be predicted from their income level (e.g., UAE, South Africa), while the reverse is true for other countries such as South Korea and Ghana. Cuba and Egypt have nearly the same real income per person, but Cuba ranks 59th on the New HDI and Egypt ranks 112th.  What about other development indicators such as the Inequality Adjusted HDI, the Gender Inequality Index, the Multidimensional Poverty Index, the SDG index? (Assignment)  Characteristics of the Developing World There are widely shared problems in developing countries (important commonalities that led to their economic development problems). Yet, there is a great deal of diversity throughout the developing world, even within these areas of broad commonality.  1) Lower Levels of Living and Productivity Even when adjusted for purchasing power parity and despite extraordinary recent growth in China and India, the low- and middle-income developing nations, with more than five-sixths (84%) of the world’s people, received only about 46% of the world’s income. Low-income countries, which account for about nine percent of the world’s population, produce just over half a percent of global GDP. Though resulting from several deeper causes, the wide disparity in income largely corresponds to the large gaps in productivity (i.e., output per worker) between developing and developed countries (vicious cycle, poverty trap or circular causation, why?).  Characteristics of the Developing World The low-income countries are themselves a very diverse group with greatly differing development challenges. Income growth rates have varied greatly in different developing regions and countries, with rapid growth in East Asia, slow or even no growth in sub-Saharan Africa. There is no necessary correlation between country size in population or area and economic development. The 12 most populous countries include representatives of all four categories: low-, lower-middle-, upper-middle-, and high-income countries (e.g., US, Nigeria, India).  Characteristics of the Developing World  2) Lower Levels of Human Capital (health, education and skills) Compared with developed countries, much of the developing world has lagged in its average levels of nutrition, health and education. However, the well-performing developing countries (e.g., East Asia) are much closer to the developed world in health and education standards than they are to the lowest income countries.  3) Higher Levels of Inequality and Absolute Poverty (Topic 4) Globally, the poorest 20% of people receive just 1.5% of world income. Bringing the incomes of those living on less than $1.25 per day up to the minimal poverty line would require less than 2% of the incomes of the world’s wealthiest 10%. It is also necessary to look at the gap between rich and poor within individual developing countries (very high levels of inequality). But inequality varies greatly among developing countries, with generally much lower inequality in Asia.  Characteristics of the Developing World  4) Higher Population Growth rates (Topic 5) World population topped 7 billion by 2012and 8 billion by 2022. Rapid population growth began in Europe and other now developed countries. But in recent decades, most population growth has been centered in the developing world. Compared with the developed countries, which often have birth rates near or even below replacement (zero population growth) levels, the low-income developing countries have very high birth rates. But population dynamics varies widely among developing countries. A major implication of high birth rates in developing nations is that the active labour force must support more children. By contrast, the proportion of people over the age of 65 is much greater in the developed nations. (Dependency burden?)  Characteristics of the Developing World  5) Greater Social Fractionalization Low-income countries often have ethnic, linguistic, and other forms of social divisions, sometimes known as fractionalization, which may lead to political instability or conflicts. More than 40% of the world’s nations have more than five significant ethnic populations. In most cases, one or more of these groups face serious problems of discrimination, social exclusion, or other systematic disadvantages.  6) Larger Rural Population but Rapid Rural-to-Urban Migration One of the hallmarks of economic development is a shift from agriculture to manufacturing and services. In developing countries, a much higher share of the population lives in rural areas. Rural areas are generally poorer. Although hundreds of millions of people are moving from rural to urban areas, Sub-Saharan Africa and most of Asia remain predominantly rural.  Characteristics of the Developing World  7) Lower Levels of Industrialization and Manufactured Exports Generally, developing countries have a far higher share of employment in agriculture than developed countries, yet lower productivity. Madagascar is a dramatic example: while about 82% of both men and women worked in agriculture, it represented only a quarter of total output. In Indonesia, 41% of both men and women worked in agriculture, but it represented just 14% of output. Along with lower industrialization, developing nations tended to have a higher dependence on primary exports. The low-income countries, particularly those in Africa, remain highly dependent on a relatively small number of agricultural and mineral exports. But the middle-income countries are now catching up with the developed world in the share of manufactured goods in their exports, even if these goods are typically less advanced in their skill and technology content.  Characteristics of the Developing World  8) Adverse Geography Landlocked economies, common in Africa, often have lower incomes than coastal economies. Many developing countries are tropical or subtropical, and this has meant that they suffer more from endemic diseases such as malaria, water resource constraints, and extremes of heat. Even with physical resource endowment in some African countries, there is no guarantee of development success (Curse of natural resources?)  9) Underdeveloped Markets Some aspects of market underdevelopment in developing countries are that they often lack (1) a legal system that enforces contracts and validates property rights; (2) a stable and trustworthy currency; (3) an infrastructure of roads and utilities that results in low transport and communication costs; (4) a well-developed and efficiently regulated  Characteristics of the Developing World system of banking and insurance; and (5) substantial market information for consumers and producers about prices, quantities, and qualities of products and resources as well as the creditworthiness of potential borrowers.  10) Colonial Legacy and External Dependence Institutions created during the colonial period (which favoured extractors rather than creators of wealth) often had harmful effects on development that in many cases have persisted to the present day. For example, property rights have been less secure, constraints on elites have been weak, and a smaller segment of society has been able to take advantage of economic opportunities. Also, developing nations have weaker bargaining positions than developed nations in international economic relations. (Climate action is a good example) How Do Low-Income Countries Today Differ from Developed Countries in Their Earlier Stages? The position of developing countries today is in many important ways significantly different from that of the currently developed countries when they were in their early stages of development.  Physical and human resource endowments: less well endowed with natural resources (e.g., less developed countries in Asia), or require heavy investments of capital to exploit them (e.g., Africa). Besides human capital (the idea gap of Romer or the ingenuity gap!! Also, R&D)  Relative levels of per capita income and GDP: today’s developing countries began their growth process at the low end of the international per capita income scale, while today’s developed nations were economically in advance of the rest of the world at the early stages of their development (relatively strong financial position).  How Do Low-Income Countries Today Differ from Developed Countries in Their Earlier Stages?  Climatic differences: Almost all developing countries are situated in tropical or subtropical climatic zones, while developed nations in the temperate zone. The extremes of heat and humidity (aggravated by climate changes) in most poor countries contribute to deteriorating soil quality, low productivity of certain crops, poor health of animals…  Population size, distribution, and growth: Before and during their early growth years, Western nations experienced a very slow rise in population growth. By contrast, the populations of many developing countries are expanding so rapidly.  The historical role of international migration: The emigration of highly educated and skilled professionals and technicians from the developing countries to the developed world (Brain drain). How Do Low-Income Countries Today Differ from Developed Countries in Their Earlier Stages?  The growth stimulus of international trade: international free trade (rapidly expanding export markets) has been called the “engine of growth” for today’s advanced nations during the nineteenth and early twentieth centuries. In the twentieth century, the situation for many developing countries was very different because they (except for a few very successful Asian countries) experienced a deteriorating trade position as their exports expanded, but usually not as fast as the exports of developed nations. Their terms of trade (the price they receive for their exports relative to the price they must pay for imports) declined over several decades. Where developing countries are successful at becoming lower-cost producers of competitive products with the developed countries, the latter have often resorted to various forms of tariff and nontariff barriers to trade (e.g., excessive sanitary requirements).  Are Living Standards of Developing and Developed Nations Converging? If the growth experience of developing and developed countries were similar, there are two important reasons to expect convergence: technology transfer (advantage of backwardness) and factor accumulation. But globally, evidence for convergence is weak for the most recent decades. For example, about 60% of countries grew more slowly than the United States. Even within developing countries, middle-income countries are growing faster than low-income countries. This can be attributed to the differences between today’s developing countries and developed countries in their earlier development stages. Research on the long-run causes of comparative economic development is still at a relatively early stage (mixed evidence).  Conclusion This topic has pointed up some important similarities across most developing countries, in contrast to contemporary and historical characteristics of developed countries. It has also shown that developing nations are very heterogeneous, differing in many critical respects. Countries will generally have to do more than simply emulate policies followed by today’s developed countries while they were in their early stages of development. Every developing country confronts its own constraints on feasible policy options and other special circumstances, and each will have to find its own path to effective economic and social institutions.  References  Todaro, M. P. and Smith, C. S. Economic Development. Twelfth Edition, Pearson Addison-Wesley, 2015. (Chapter Two)  Paprotny, D. Convergence Between Developed and Developing Countries: A Centennial Perspective. Soc Indic Res 153, 193–225 (2021). https://doi.org/10.1007/s11205-020-02488-4 Economic Development 2024 / 2025  Part Two (Problems & Policies: Domestic) 4. Poverty, Inequality, and Development After talking about the basic principles and concepts of economic development, the second part of the course focuses on pressing issues (problems) affecting developing countries today. We examine the nature of each problem and the policies designed to help overcome them.  Poverty, Inequality, and Development Despite significant improvements over the past half century, extreme poverty remains widespread in the developing world (SDG 1). These impoverished people often suffer from undernutrition and poor health, have little or no literacy, live in environmentally degraded areas, have little political voice, and are socially excluded. Development requires a higher sustained gross national income (GNI). The basic issue, however, is not only how to make GNI grow but also who would make it grow: the few or the many. Many developing countries that had experienced relatively high rates of economic growth by historical standards discovered that such growth often brought little in the way of significant benefits to their poor.  Poverty, Inequality, and Development In this topic, we discuss the problem of poverty and highly unequal distributions of income by examining some critical questions about the relationship among economic growth, income distribution, and poverty:  How can we best measure inequality and poverty?  What’s so bad about extreme inequality and poverty?  Are the rapid economic growth objective and the two objectives of more equal distributions of income and poverty eradication compatible or conflicting objectives for developing countries?  What kinds of policies are required to reduce the magnitude and extent of absolute poverty?  Measuring Inequality Economists usually distinguish between two principal measures of income distribution: the personal or size distribution of income and the functional or distributive factor share distribution of income.  Personal distribution of income is the most used measure by economists. It is the distribution of income according to class of persons—for example, the share of total income accruing to the poorest or the richest specific percentage of a population— without regard to the sources of that income.  Functional distribution of income (factor share distribution of income) is the distribution of income to factors of production (land, labour, capital) without regard to the ownership of the factors.  Measuring Inequality Personal (size) distribution of income: Individuals are arranged by ascending personal incomes and then divided into distinct groups, or sizes (quintiles or deciles). If income inequality is defined as the disproportionate distribution of total national income among households, then one common measure of income inequality is the ratio of the incomes received by the top 20% and bottom 40% of the population. This ratio, sometimes called a Kuznets ratio. Another common way to analyse personal income statistics is to construct a Lorenz curve which is a graph depicting the variance of the size distribution of income from perfect equality. A very convenient shorthand summary measure of the relative degree of income inequality in a country can be obtained from the Gini coefficient calculated as the ratio of the area between the diagonal and the Lorenz curve divided by the total area of the half-square in which the curve lies.  Measuring Inequality Functional distribution of income: This concept attempts to explain the income of a factor of production by the contribution that this factor makes to production. It is a logical theory in that each factor gets paid only in accordance with what it contributes to national output, no more and no less. Unfortunately, the relevance of the functional theory is greatly diminished by its failure to consider the important role and influence of nonmarket forces such as power in determining these factor prices—for example, the role of collective bargaining between employers and trade unions in the setting of modern-sector wage rates, and the power of monopolists and wealthy landowners to manipulate prices on capital, land, and output to their own personal advantage.  Measuring Absolute Poverty Absolute poverty is the situation of being unable or only barely able to meet the subsistence essentials (basic needs) of food, clothing, and shelter.  The extent of absolute poverty can be defined as the number of people living below a specified minimum level of real income—an international poverty line (what is the most recent international poverty line?) Headcount index is the proportion of a country’s population living below the poverty line. However, simply counting the number of people below an agreed-on poverty line has a serious limitation. If the poverty line is set at U.S. $450 per person, both earning $400 and $300 are given the same weight when calculating the proportion of the population that lies below the poverty line; clearly, however, the poverty problem is much more serious in the latter instance.  Measuring Absolute Poverty  Therefore, economists attempt to calculate Total poverty gap (TPG) which is the sum of the difference between the poverty line and actual income levels of all people living below that line. 𝐻 𝑇𝑃𝐺 = ෍ 𝑌𝑝 − 𝑌𝑖 𝑖=1  Another measure is the Foster-Greer-Thorbecke Index (Pα class of poverty measures) which is concerned with the degree of income inequality among the poor rather than the number of the poor (gives higher weight to the poorer). Among this class of poverty measures, the squared poverty gap index (P2), has become a standard of income poverty measure used by the World Bank and other agencies 𝐻 𝛼 1 𝑌𝑝 − 𝑌𝑖 𝑃𝛼 = ෍ 𝑁 𝑌𝑝 𝑖=1  Measuring Absolute Poverty  Multidimensional Poverty Measurement: Poverty cannot be adequately measured with income alone (Amartya Sen’s capability framework). In the multidimensional poverty approach, a poor person is identified through what is called the “dual cutoff method”. Three dimensions are often selected which are: health, education, and standard of living (e.g., lack of electricity, safe drinking water, sanitation). The most basic measure is the fraction of the population in multidimensional poverty—the multidimensional headcount ratio HM. Also, the intensity of deprivation can be measured (the percentage of indicators for which poor households are deprived on average). In applied studies, proxy measures, called indicators, are used for each of the selected dimensions.  What’s So Bad about Extreme Inequality and Poverty?  Extreme income inequality leads to economic inefficiency (because with higher inequality a smaller fraction of the population qualifies for a loan or other credit, and the overall rate of savings in the economy tends to be lower).  Extreme income disparities undermine social stability and strengthen the political power of the rich.  Extreme inequality is generally viewed as unfair. Most people vote for some inequality of income outcomes, to the extent that these correspond to incentives for hard work or innovation. But even so, most vote for less inequality than is seen in the world today.  What’s So Bad about Extreme Inequality and Poverty?  Extreme poverty can lead to a collapse of tax revenues, followed by government bankruptcy and further economic collapse, a syndrome that now threatens dozens of poor countries.  High-poverty groups are not only characterized by their low levels of income, but they also have some common economic characteristics such as: - The poor are disproportionately located in rural areas. However, most 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.  What’s So Bad about Extreme Inequality and Poverty? - Women make up a substantial majority of the world’s poor. Women and children experience the harshest deprivation. They are more likely to be poor and malnourished and less likely to receive medical services, clean water, sanitation, and other benefits. - Poverty falls especially heavily on minority ethnic groups. In recent years, domestic conflicts and even civil wars have arisen out of ethnic groups’ perceptions that they are losing out in the competition for limited resources and job opportunities.  Are rapid economic growth and more equal income distribution compatible or conflicting objectives for developing countries? Using Field’s three special cases based on the traditional and modern sectors dichotomy like in the Lewis model. These three typologies offer different predictions about what will happen to inequality during economic growth (also think if temporary or not):  The traditional-sector enrichment growth typology, in which all the benefits of growth are divided among traditional-sector workers, with little or no growth occurring in the modern sector. Growth results in higher income, a more equal relative distribution of income, and less poverty.  The modern-sector enrichment growth typology, in which the economy grows but such growth is limited to a fixed number of people in the modern sector, with both the numbers of workers and their wages held constant in the traditional sector. Growth results in higher incomes, a less equal relative distribution of income, and no change in poverty.  The modern-sector enlargement growth typology, in which the two-sector economy develops by enlarging the size of its modern sector while maintaining constant wages in both sectors. Here absolute incomes rise, and absolute poverty is reduced, but the Lorenz curves will always cross (temporarily).  Are rapid economic growth and more equal income distribution compatible or conflicting objectives for developing countries? The process of modern-sector enlargement growth suggests a possible mechanism that can give rise to Kuznets’s “inverted-U” hypothesis. Simon Kuznets suggested that in the early stages of economic growth, the distribution of income will tend to worsen; only at later stages will it improve. This is always related to the nature of structural change. Early growth may, in accordance with the Lewis model, be concentrated in the modern industrial sector, where employment is limited but wages and productivity are high. Alternatively, returns to education may first rise as the emerging modern sector demands skills and then may fall as the supply of educated workers increases and the supply of unskilled workers falls. However, the validity of the Kuznets curve is an empirical question. It all depends on the nature of the development process and the character of economic growth.  Are the reduction of poverty and the acceleration of growth in conflict or complementary? Traditionally, a body of opinion held that rapid growth is bad for the poor because they would be bypassed and marginalized by the structural changes of modern growth. Moreover, it is argued that public expenditures required for the reduction of poverty would entail a reduction in the rate of growth and concentrated efforts to lower poverty would slow the rate of growth. However, there are at least five reasons why policies focused toward reducing poverty levels need not lead to a slower rate of growth—and indeed could help to accelerate growth.  Widespread poverty creates conditions in which the poor have no access to credit.  The rich in many poor countries are generally not noted for their desire to save and invest substantial proportions of their incomes in the local economy.  Are the reduction of poverty and the acceleration of growth in conflict or complementary?  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.  Raising the income levels of the poor will stimulate an overall increase in the demand for locally produced necessity products like food and clothing, and hence stimulate local production, employment and investment.  A reduction of mass poverty can stimulate healthy economic expansion by acting as a powerful incentive to widespread public participation in the development process. So, promoting rapid economic growth and reducing poverty are entirely compatible objectives. This is also supported by empirical evidence (e.g., China). Yet growth doesn’t guarantee poverty reduction.  Policy Options on Income Inequality and Poverty Here we talk only about income aspects (nonincome aspects of poverty such as education and health are beyond the scope of this section). There are four broad areas of possible government policy intervention which are:  Altering the functional distribution of income through relative factor prices (shares of national income that accrue to the owners of each factor).  Modifying the size distribution through increasing assets of the poor.  Moderating (reducing) the size distribution at the upper levels through progressive taxation of personal income and wealth to promote inclusive growth.  Moderating (increasing) the size distribution at the lower levels through public expenditures of tax revenues to raise the incomes of the poor either directly or indirectly.  Policy Options on Income Inequality and Poverty First, Altering the Functional Distribution of Income through Relative Factor Prices: It is argued that because of institutional constraints and faulty government policies, the relative price of labour in the formal, modern, urban sector is higher than what would be determined by the free interplay of the forces of supply and demand. From this it is argued that measures designed to reduce the price of labour relative to capital will cause employers to substitute labour for capital in their production activities. Such factor substitution increases the overall level of employment and ultimately raises the incomes of the poor. However, in recent years, some scholars and practitioners argue that minimum wages may be beneficial for poverty reduction (this depends on local circumstances).  Policy Options on Income Inequality and Poverty Moreover, often the price of capital equipment is “institutionally” set at artificially low levels through various public policies such as investment incentives and low tariffs on capital goods imports relative to consumer goods. If the price of capital would rise to its true “scarcity” level, producers would have a further incentive to increase their utilization of the abundant supply of labour and lower their uses of scarce capital. Moreover, owners of capital would not receive the artificially high economic returns they now enjoy. So, correcting factor prices (removing factor price distortions) would, in general, not only increase productivity and efficiency but also reduce inequality by providing more wage-paying jobs for currently unemployed or underemployed unskilled and semiskilled workers. It would also lower the artificially high incomes of owners of capital. However, how much this contributes will depend on the degree to which firms and farms switch to more labour-intensive production methods as the relative price of labour falls and the relative price of capital rises (empirical question).  Policy Options on Income Inequality and Poverty Second, Modifying the Size Distribution through Increasing Assets of the Poor: The ultimate cause of the unequal distribution of personal incomes in most developing countries is the unequal and highly concentrated patterns of asset ownership (land, physical capital, human capital, financial resources) in these countries. In this case, correcting factor prices is certainly not sufficient. Rather, focusing directly on reducing the concentrated control of assets, the unequal distribution of power, and the unequal access to educational and income-earning opportunities that characterize many developing countries is more effective (redistribution policies such as land reform and microcredit). Human capital in the form of education and skills is another example of the unequal distribution of productive asset ownership. Public policy should therefore promote wider access to educational opportunities (for girls as well as boys) as a means of increasing income-earning potential for more people (given that there are employment opportunities for the educated).  Policy Options on Income Inequality and Poverty Third, Reducing the Size Distribution at the Upper Levels through Progressive Taxation: Improving the living standards of the bottom 40% is often financed by the progressive taxation of income and wealth (a progressive income tax is a tax whose rate increases with increasing personal incomes). The burden of the tax is designed to fall most heavily on the upper-income groups. 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 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!?  Policy Options on Income Inequality and Poverty Fourth, Increasing the Size Distribution at the Lower Levels through Direct Transfer Payments and the Public Provision of Goods and Services: The direct provision of tax-financed public consumption goods and services to the very poor is another potentially important instrument of a comprehensive policy designed to eradicate poverty (e.g., public health projects, school meals). Direct money transfers and subsidized food programs for the urban and rural poor, as well as direct government policies to keep the prices of essential foodstuffs low, represent additional forms of public consumption subsidies (direct transfers and subsidies can be highly effective but they need to be designed carefully?? One example is workfare programs).  Policy Options on Income Inequality and Poverty  Regarding the alternative policy approaches to the problems of poverty and inequality in development, the need is not for one or two isolated policies but for a “package” of complementary and supportive policies.  In addition to the four broad areas discussed, a set of targeted policies to directly improve the well- being of the poor and their communities, which goes beyond safety net schemes, to offer programs that build capabilities and human and social capital of the poor, such as microfinance, health, education, agricultural development, environmental sustainability, and community development and empowerment programs. These can be carried out either by government or by nongovernmental organizations through local and international support.  Therefore, while providing a focus on ending extreme poverty and mitigating harmful inequality, such policies can be designed to encourage and accelerate inclusive economic growth targeted at the poor, while keeping in mind the inherently multidimensional nature of poverty. Economic Development 2024 / 2025 Part Two (Problems & Policies: Domestic) 5. Population Growth and Economic Development: Causes, Consequences, and Controversies  Population Growth and Economic Development  The world’s population reached 7.2 bn in 2013, and at that year it was projected to rise 8.1 bn in 2025 and 9.6 bn by 2050.  In 2023 it has already reached the 8.1 bn projection of 2025 (the day of 8 bn was 15-November 2022) and it is now projected to rise to 9.7 bn by 2050.  The most populous countries are China (1.4 bn) and India (1.4 bn); however, Africa is the fastest growing continent.  Population Growth and Economic Development More than half of the global population growth till 2050 is expected to occur in Africa (and 97% of the net population increase is in developing countries). This means that countries with the highest fertility rates tend to be those with the lowest per capita income. Population Growth and Economic Development Some questions raised here:  What will be the economic and social implications of this population growth (in terms of living standards, health, education, self-esteem, freedom of choice…) for current and future generations?  Is the scenario of “9.7 bn by 2050” inevitable or depends on development efforts?  Is rapid population growth a serious problem in itself or is it a manifestation of more fundamental problems of underdevelopment and inequality in resource utilization?  Population Growth and Economic Development Under this topic we examine:  Historical and recent population trends, the structure of the world’s population and some basic demographic concepts.  Well-known economic models regarding the causes and consequences of rapid population growth, and the controversies surrounding the significance of the population factor.  Alternative policy options to influence the size and growth of a country’s population, and ways by which industrialised countries can contribute to a more manageable global population.  Population Growth: Past, Present and Future  For most of human existence on earth, humanity’s numbers have been few. From Year 1 on calendar to the beginning of industrial revolution around 1750, it tripled from 250 million to 728 million people (less than ¾ of India today).  The next 200 years (1750-1950), an additional 1.7 bn were added.  But in just 4 decades (1950-1990) they became 5.3 bn.  In 1950, two thirds of the world population lived in developing countries. By 2050 the population of less developed countries will reach 7/8 of the world’s population.  The population of the least developed countries will increase by tenfold (from 200 million to 2 billion). But the population of the developed countries will grow very little, even accounting for immigration. World Population Growth, 1950-2050  Population Growth: Past, Present and Future  In terms of growth rates, for almost all human existence till 300 years ago the population grew at an annual rate of 0.002%, with many ups and downs due to natural catastrophes. By 1750, accelerated to 0.3% per year. By 1950, accelerated again to about 1%. Till 1970, peaked at 2.35%. Today it remains at a historically high rate of nearly 1.2% per year. However, in Africa still at an extremely high rate (2.3% per year).  Population Growth: Past, Present and Future  Before 1650, it took nearly 36000 years for the world generation to double, but today only about 58 years at current growth rates. The reason for the change in overall population trends is that for almost all of recorded history, the rate of population growth has been strongly influenced by the effects of famine, diseases, war…which led to high death rates. In the 20th century, such conditions came under technological and economic control.  Structure of the World’s population The world’s population is unevenly distributed by: a)Geographic region b)Fertility and mortality rates c)Age structure World population distribution by region, 2010, 2022 & 2050  World population distribution by fertility and mortality trends The rate of population increase is measured as the percentage yearly net relative increase in population size due to natural increase and net international migration. Natural increase: difference between birth rate and death rate of a given population (fertility and mortality). Net international migration: excess of persons migrating into over those who emigrate from a country. The net international migration was an extremely important source of population increase in North America, Australia and New Zealand in the 19th and early 20th centuries, but it is of limited importance now. Population changes in developing countries depend almost entirely on the difference between crude birth rates and death rates.  World population distribution by fertility and mortality trends (Birth rates)  Most developing nations birth rates ranges from 15 to 45 per 1000, while almost all developed countries have birth rates less than 15 per 1000.  According to the latest figures in 2023, all the 20 countries with the highest birth rates are in Sub-Saharan Africa (except Afghanistan). Niger has the highest birth rate (47 per 1000).  Developing countries birth rates are often higher than they were in pre-industrial western Europe.  The total fertility rate fell dramatically in many countries since 1970 but remains high in Sub-Saharan Africa. In 2023, the world total fertility rate is 2.4 (the highest is Niger 6.73)  World population distribution by fertility and mortality trends (death rates)  Death rates are nowadays lower by 50% in some parts of Asia and by over 30% in Africa and the Middle East due to modern vaccinations, public health facilities, clean water, improved nutrition…  The gap in life expectancy at birth is sharply reduced in recent decades. In 1950 it was 62-65 years in developed countries and 35-40 years in developing countries, while in 2023 it is 75 for male and 82 for female in developed countries compared to 69 and 73 in developing countries.  Also, considerable progress has been made on reducing the under-5 mortality rates (globally from 93 deaths per 1000 births in 1990 to 38 deaths in 2021, and in Sub- Saharan Africa from 184 in 1990 to 73 in 2021). World population by age structure  World population by age structure  Population is relatively youthful in the developing world.  Africa has the youngest population worldwide which leads to high youth dependency ratio.  When high numbers reach the working age, either potential crisis of unemployment or important window of opportunity (demographic dividend).  The main problem in developed countries relate to their low population growth and high old dependency ratio.  The more rapid the population growth rate is, the higher the youth dependency ratio. This phenomenon of youth dependency also leads to an important concept “ the hidden momentum of population growth”.  World population by age structure The hidden momentum of population growth: the phenomenon whereby there is a built-in tendency of population growth to continue even after birth rates decline substantially. This relates to the age structure of a country’s population represented by the population pyramid. If young people outnumber their parents, we can conclude that when their generation reaches adulthood the number of potential parents will inevitably be much higher than at present. Even if these new parents have only enough children to replace themselves, the total population will still increase substantially. World population by age structure  Demographic transition It is the phasing out process of population growth rates from an almost stagnant growth stage, characterized by high birth and death rates through a rapid-growth stage with high birth rates and low death rates to a stable low-growth stage in which both birth and death rates are low. All contemporary developed nations have passed through the same three stages of modern population history (stages 4 & 5?) The patterns of demographic transition in Europe are clear, though research continues to better identify the causal factors, while in developing countries population histories fall into two patterns. Demographic transition  The Causes of High Fertility in Developing Countries: The Malthusian and Household Models So, the important question is: When and under what conditions are developing nations likely to experience falling birth rates and slower expansion of population? Or what are the principal determinants or causes of high fertility rates in developing countries?? And can these determinants be influenced by government policy? To answer these questions: 1) Malthusian population trap 2) Household theory of fertility  The Causes of High Fertility in Developing Countries: The Malthusian Population Trap  More than two centuries ago, Thomas Malthus put forward a theory of the relationship between population growth and economic development.  He postulated a universal tendency for population of a country, unless checked, to grow at a geometric rate, doubling every 30 to 40 years. At the same time, because of diminishing returns to land (fixed factor), food supplies could expand only at a roughly arithmetic rate.  Per capita incomes would tend to fall so low as to lead to a level of living barely at or slightly above the subsistence level.  The only way to avoid this condition of chronic low levels of living was birth control. The Malthusian population trap The Causes of High Fertility in Developing Countries: The Malthusian Population Trap  Countries in such a population trap can also escape it by achieving technological progress that shifts the income growth rate curve up at any stage of development or achieve social progress that shifts the population growth curve down. Thus, the population trap equilibrium is eliminated altogether. Criticisms of the Malthusian Model (not empirically verified): 1) It ignores the enormous impact of technological progress in offsetting the growth- inhibiting forces of rapid population increases. 2) It assumes that national rates of population increase are positively related to the level of per capita income (assumed macro relationship).  The Causes of High Fertility in Developing Countries: The Microeconomic Household Theory of Fertility  The microeconomic determinants of family fertility provide better explanation for the observed falling birth rates associated with Stage 3 of the demographic transition.  This theory draws on the traditional neoclassical theory of household and consumer demand, and the principles of optimization to explain family size decisions.  Children are considered as a special kind of consumption good so that fertility becomes a rational economic response to the family’s (consumer’s) demand for children relative to other goods.  This theory assumes that the household demand for children is determined by family preferences for a certain number of surviving children, the price of rearing these children, and by levels of family income. Applied to the additional children. The Causes of High Fertility in Developing Countries: The Microeconomic Household Theory of Fertility  The Consequences of High Fertility: Some conflicting Perspectives  It is not a real problem 1) The problem is not population growth but other issues (Underdevelopment, world resource depletion and environmental destruction, population distribution, subordination of women). 2) It’s a deliberately contrived false issue (neocolonial dependence theory). 3) It is a desirable phenomenon (consumer demand, underpopulated rural regions).  The Consequences of High Fertility: Some conflicting Perspectives  It is a real problem 1) Extremist argument (population and global crisis). 2) Population-poverty cycles and the need for family-planning programs (but keep in mind that growth in productivity, especially structural transformation, is usually more important in economic development). 3) Other empirical arguments (Seven negative consequences: economic growth, poverty and inequality, education, health, food, environment, international migration).  The Consequences of High Fertility: Some conflicting Perspectives  Toward a consensus (3 essential components of the consensus opinion): 1) Population growth is not the primary cause of low-levels of living, extreme inequalities or limited freedom of choice. 2) It is not simply a problem of numbers but involves the quality of life and well- being. 3) Rapid population growth does serve to intensify problems of underdevelopment and make prospects for development much more remote.  Some Policy Approaches  What developing countries can do? 1) Focus on the fundamental motivational basis for the freedom of individual to choose an optimal smaller family size (long-run development policies). 2) In the short-run, enhance family planning programs (technological means to regulate fertility for motivated people), persuade people (media, education), manipulate economic incentives, coerce people, raise social and economic status of women.  Some Policy Approaches  What developed countries can do? 1) Simplify their own consumption lifestyles (free resources). 2) Liberalize the legal conditions for international migration of poor unskilled workers.  How developed countries can help developing countries with their population programs? 1) Genuine support through improved trade relations, technology transfer, more equitable sharing of scarce resources, fertility control research… 2) Financial assistance for family-planning programs, national population research activities, public education… Economic Development 2024 / 2025 Part Two (Problems & Policies: Domestic) 6. Urbanization and Rural-Urban Migration: Theory and Policy This topic focuses on one of the most complex dilemmas of the development process: the phenomenon of massive and historically unprecedented movements of people from the rural countryside to the burgeoning cities of developing countries. According to the UN estimate, by 2050 the world population is expected to reach 9.7 billion people, and nowhere will population growth be more dramatic than in the cities of the developing world. In this topic we  Review trends and prospects for overall urban population growth  Examine the potential role of cities—both the modern sector and the urban informal sector—in fostering economic development  Examine a well-known theoretical model of rural-urban labour transfer in the context of high urban unemployment  Evaluate various policy options that governments in developing countries may pursue in their attempts to moderate the heavy flow of rural-urban migration and to ameliorate the serious unemployment problems that continue to plague their crowded cities  Urbanization: Trends and Living Conditions Urbanization rates increase whenever urban population growth exceeds rural population growth.  Urbanization: Trends and Living Conditions The positive association between urbanization and per capita income is one of the most obvious and striking stylized facts of the development process.  Urbanization: Trends and Living Conditions In recent decades urbanization has continued in nearly all developing countries, even those that have experienced only minimal industrialization.  Urbanization: Trends and Living Conditions In most regions of the developing world, because population is so much larger, the sheer numbers of people coming into the city is unprecedented. Also unprecedented are the very large sizes of individual cities at such low levels of income per capita.  Urbanization: Trends and Living Conditions Rank City Country 2023 Population 2022 Population Growth Rate 1 Tokyo Japan 37,194,105 37,274,002 -0.21% 2 Delhi India 32,941,309 32,065,760 2.73% 3 Shanghai China 29,210,808 28,516,903 2.43% 4 Dhaka Bangladesh 23,209,616 22,478,117 3.25% 5 Sao Paulo Brazil 22,619,736 22,429,799 0.85% 6 Mexico City Mexico 22,281,442 22,085,139 0.89% 7 Cairo Egypt 22,183,201 21,750,020 1.99% 8 Beijing China 21,766,214 21,333,331 2.03% 9 Mumbai India 21,296,517 20,961,473 1.6% 10 Osaka Japan 19,013,434 19,059,857 -0.24%  Urbanization: Trends and Living Conditions Going forward almost all the increments to the world’s population will be accounted for by the growth of urban areas as migrants continue to stream into the cities from rural areas and as urbanization rates in the developing world continue to approach those of the developed world.  Urbanization: Trends and Living Conditions A central question related to the unprecedented size of these urban agglomerations is how these cities will cope with such high and rapidly rising concentrations of people. While it is true that cities offer the cost-reducing advantages of agglomeration economies and economies of scale and proximity, for many analysts the social costs of increasingly overloading of housing and social services, not to mention increased crime, pollution, and congestion, can outweigh these historical urban advantages. Along with the rapid spread of urbanization and the urban bias in development strategies has come this prolific growth of huge slums and shantytowns. Today, at least one billion people live in urban slum settlements, representing nearly one-third of the urban population in all developing countries. Such trends would point to a slum population of as large as 3 billion people in 2050.  Urbanization: Trends and Living Conditions Statistics show that rural migrants constitute anywhere from 35% to 60% of recorded urban population growth. About three-quarters of developing countries responding to UN surveys indicated that they had initiated policies to slow down or reverse their accelerating trends in rural-urban migration, and/or desire to do so. With birth rates declining in many developing countries, rapid urban growth and accelerated rural-urban migration will undoubtedly be one of the most important development and demographic issues of the coming decades. And in urban areas, the growth and development of the informal sector, as well as its role and limitations for labour absorption and economic progress, will assume increasing importance.  The Role of Cities There are some potential advantages offered by cities. Urban areas have played a highly constructive role in the economies of today’s developed countries, and they offer huge and still largely untapped potential to do the same for developing countries. Cities are formed because they provide cost advantages to producers and consumers through what are called agglomeration economies. These agglomeration economies come in two forms. Urbanization economies are effects associated with the general growth of a concentrated geographic region. Localization economies are effects captured by particular sectors of the economy, such as finance or automobiles, as they grow within an area.  The Role of Cities Industrial districts An economic definition of a city is “an area with relatively high population density that contains a set of closely related activities.” Firms often prefer to be located where they can learn from other firms doing similar work. Learning takes place in both formal relationships and informal ones. These spillovers are also agglomeration economies, part of the benefits of what is called “industrial districts”. Other benefits include flexible specialization, marketing advantages, social capital. (Measure agglomeration benefits). A growing body of evidence shows that industrial clusters are increasingly common in developing countries. Nevertheless, the dynamism of these clusters has varied widely.  The Role of Cities Agglomeration economies do not imply that it would be efficient for all of a country’s industries to be located together in a single city. There are also some important congestion costs. The concentrating forces of urban agglomeration economies are opposed by the dispersing forces of diseconomies featuring increasing costs with greater concentration, and thus we need to determine the efficient urban scale. Of course, there is nothing inherently wrong with very large cities per se—even megacities have some special productive advantages in a global economy. But the distortions that have led to the outsize cities prevalent in developing countries have been costly and problematic.  The Urban Giantism Problem In the case of developing countries, the main transportation routes are often a legacy of colonialism for the ease of extraction of the country’s natural resources. This type of transportation system is also called a “hub-and-spoke system”. Moreover, governments are less involved in the dispersal of economic activity to more manageable sizes or, if they are involved, are often less effective. This leads to urban giants. For example, while the largest urban area in the United States, the New York area, has about 6% of the national population and Toronto has about 15% of the Canadian population, Mexico City holds nearly one-fifth of the population of Mexico, Montevideo nearly half of the population of Uruguay, and Buenos Aires and Santiago close to a third of the populations of Argentina and Chile.  The Urban Giantism Problem First-City Bias 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. 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. This is further reinforced by the capital market failures that make the creation of new urban centers a task that markets cannot complete. Another explanation for urban giants focuses on the consequences of dictators’ efforts to remain in power. Another political economy factor is the fact that firms prefer to be located where they have easy access to government officials and low cost of doing business.  The Urban Informal Sector The existence of an unorganized, unregulated, and mostly legal but unregistered informal sector was recognized in the 1970s in several developing countries (Definition of informal sector?) It is defined here as the part of the urban economy of developing countries characterized by small competitive individual or family firms, petty retail trade and services, labour-intensive methods, free entry, and market-determined factor and product prices. With the unprecedented rate of growth of the urban population in developing countries expected to continue and with the increasing failure of the rural and urban formal sectors to absorb additions to the labour force, more attention is being devoted to the role of the informal sector in serving as a solution for the growing unemployment problem. In many developing countries, about half of the employed urban population works in the informal sector (opportunity or last resort?)  The Urban Informal Sector The informal sector is characterized by many small-scale production and service activities that are individually or family-owned and use simple, labour-intensive technology. The usually self-employed workers in this sector have less formal education, are generally unskilled, and lack access to financial capital. As a result, worker productivity and income tend to be lower in the informal sector than in the formal sector. Moreover, workers in the informal sector do not enjoy the measure of protection afforded by the formal modern sector in terms of job security, decent working conditions, and old-age pensions. Many workers entering this sector are recent migrants from rural areas unable to find employment in the formal sector. In terms of its relationship with other sectors, the informal sector is linked with the rural sector in that it allows excess labour to escape from rural poverty and underemployment. The formal sector depends on the informal sector for cheap inputs and wage goods for its workers, and the informal sector in turn depends on the growth of the formal sector for a good portion of its income and clientele.  The Urban Informal Sector Several arguments can be made in favour of promoting the informal sector:  Informal sector plays an important role in providing income opportunities for the poor. The formal sector in developing countries often has a small base in terms of output and employment.  It generates surpluses even in a hostile policy environment that denies it access to the advantages offered to the formal sector. Thus, the informal sector’s surplus could provide an impetus to growth in the urban economy.  As a result of its low capital intensity, only a fraction of the capital needed in the formal sector is required to employ a worker in the informal sector, offering considerable savings to developing countries.  By providing access to training and apprenticeships at substantially lower costs than provided by the formal sector, the informal sector can play an important role in the formation of human capital.  The Urban Informal Sector  The informal sector generates demand for semiskilled and unskilled labour, whose supply is increasing and is unlikely to be absorbed by the formal sector.  It is more likely to adopt appropriate technologies and make use of local resources.  It plays an important role in recycling waste materials.  Promotion of the informal sector would ensure an increased distribution of the benefits of development to the poor, many of whom are concentrated in the informal sector. Promotion of the informal sector is not, however, without its disadvantages. One of the major disadvantages lies in the strong relationship between rural-urban migration and labour absorption in the informal sector. This aggravates the urban unemployment problem by attracting more labour than either the desirable parts of the informal or the formal sector could absorb. Other disadvantages include environmental consequences, increased densities in slums, poor urban services.  The Urban Informal Sector The International Labor Organization has made some general suggestions as to what sorts of measures might be adopted to promote the informal sector:  Governments will have to abandon their hostility toward the informal sector.  Governments should facilitate training in the areas that are most beneficial to the urban economy. In this way, the government can play a role in shaping the informal sector so that it contains production and service activities that provide the most value to society.  Governments should improve access to credit, technology, infrastructure and suitable locations.  Governments should promote the informal sector outside the urban areas.  Migration and Development Rates of rural-urban migration in developing countries have exceeded rates of urban job creation and thus have surpassed greatly the absorption capacity of both industry and urban social services. Migration worsens rural-urban structural imbalances in two direct ways. First, internal migration swell the urban labour supply while depleting the rural countryside of valuable human capital. Second, on the demand side, urban job creation is generally more difficult and costly to accomplish than rural job creation (rising share of modern-sector output growth is accounted for by increases in labour productivity). Hence, a long-run situation of chronic urban surplus labour. But the impact of migration on the development process is much more pervasive than its exacerbation of urban unemployment and underemployment. Understanding the causes, determinants, and consequences of internal rural-urban labour migration is thus central to understanding the nature and character of the development process and to formulating policies to influence this process in socially desirable ways.  Toward an Economic Theory of Rural-Urban Migration The economic development of western Europe and the United States was closely associated with the movement of labour from rural to urban areas. Urbanization and industrialization were in essence synonymous. But the overwhelming evidence of the past several decades, when developing nations witnessed a massive migration of their rural populations into urban areas despite rising levels of urban unemployment and underemployment, lessens the validity of the Lewis two-sector model of development. Therefore, an explanation of the rural-urban migration phenomenon, as well as policies to address the resulting problems, must be sought elsewhere. One theory to explain the apparently paradoxical relationship of accelerated rural-urban migration in the context of rising urban unemployment has come to be known as the Todaro migration model and in its equilibrium form as the Harris-Todaro model.  Toward an Economic Theory of Rural-Urban Migration Todaro migration model is a theory that explains rural-urban migration as an economically rational process despite high urban unemployment. Migrants calculate (present value of) urban expected income (or its equivalent) and move if this exceeds average rural income. Because expected incomes are defined in terms of both wages and employment probabilities, it is possible to have continued migration despite the existence of sizable rates of urban unemployment. Harris-Todaro model is an equilibrium version of the Todaro migration model that predicts that expected incomes will be equated across rural and urban sectors when considering informal-sector activities and outright unemployment. Toward an Economic Theory of Rural-Urban Migration  Toward an Economic Theory of Rural-Urban Migration There are many ways to extend the model:  It is assumed that those who migrate and do not get a modern job receive no income; but if they instead receive urban informal-sector income, we modify expected income accordingly.  if instead of assuming that all migrants are the same, we incorporate the reality of different levels of human capital (education), we can understand why a higher proportion of the rural educated migrate than the uneducated.  The Todaro and Harris-Todaro models are relevant to developing countries even if the wage is not fixed by institutional forces. The emergence of a high modern-sector wage can also result from other common features of labour markets such as cost of labour turnover and efficiency wage payments.  Toward an Economic Theory of Rural-Urban Migration Policy Implications:  Imbalances in urban-rural employment opportunities caused by the urban bias, particularly first-city bias, of development strategies must be reduced. When urban wage rates rise faster than average rural incomes, they stimulate further rural-urban migration despite rising levels of urban unemployment. Policy distortions that induce more rapid rural-to-urban migration than would otherwise occur generally reduce overall social welfare.  Urban job creation is an insufficient solution for the urban unemployment problem (induced migration, hence more urban employment leads to higher levels of urban unemployment!).  Toward an Economic Theory of Rural-Urban Migration Policy Implications:  Indiscriminate educational expansion will lead to further migration and unemployment (better curtail public investment in higher education). Need to modify the linkages between education and employment (base the hiring practices and their wage structures on other criteria)  The overall welfare impact of a wage subsidy policy when both the rural and urban sectors are considered is not immediately clear. A standard economic policy prescription for generating urban employment opportunities is to eliminate factor price distortions by using “correct” prices. Although such policies can generate more labour-intensive modes of production, they can also lead to higher levels of unemployment in accordance with our argument about induced migration.  Toward an Economic Theory of Rural-Urban Migration Policy Implications:  Programs of integrated rural development should be encouraged. Policies that operate only on the demand side of the urban employment are probably far less effective in the long run in alleviating the unemployment problem than policies designed directly to regulate the supply of labour to urban areas. Clearly, however, some combination of both kinds of policies is most desirable. Integrated rural development should focus on both farm and nonfarm income generation, employment growth, health care delivery, educational improvement, infrastructure development (electricity, water, roads, etc.), and the provision of other rural amenities.