development economics v (cntd.)
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Development EconomicsV (cntd.)
Prof. Dr. Hans H. Bass
Jacobs University, Spring 2010
March 11, 2010 2
Development EconomicsAgenda
Feb. 25 / March 11
1. Urbanization2. The Urban Informal Sector3. Rural to Urban Migration
March 11, 2010 3
2. The Urban Informal Sector The Lewis Model Revisited
Two sectors: agriculture and modern urban sector in agriculture MPL = 0 agricultural wage rate = average product institutional inflexibility of wage rate in the modern sector:
(a) trade unions, (b) employment strategies of TNCs agricultural wage rate < modern sector wage rate
March 11, 2010 4
2. The Urban Informal Sector The Lewis Model Cntd
rural to urban migration exceeds employment opportunities in the modern sector
rationing of modern sector employment according to formal education
short-term reaction: all sorts of odd jobs long-term reaction: investment into formal education increased growth potential by accumulation of human
capital however: employment rate increases only if
industrialization more rapid than population growth
March 11, 2010 5
2. The Urban Informal Sector Characteristics
Why is, in spite of the continuous flow of migrants, urban unemployment still low?
IS “discovered” 1973 by Keith Hart (Accra) and ILO mission to Kenya:(1) ease of entry(2) reliance on indigenous resources(3) family ownership (4) small scale of operation(5) labour intensive and adapted technology(6) skills acquired outside the formal school system(7) unregulated and competitive markets
(Source: ILO 1973)
March 11, 2010 6
2. The Urban Informal Sector Definitions of the IS
"a mode of organisation different from the unit of production most familiar in economic theory, the firm or corporation. These activities are also likely to be unregulated by the state and excluded from standard economic accounts of national income" (Swaminathan/WIDER, 1991, p.1)
"units of production, services and commerce whose management method differs from that of the modern sector (in particular the absence of standardized accounts)" (Lachaud/ILO 1994, p. 94)
units engaged in the production of goods and services with the primary objective of generating employment and incomes to the persons concerned; low level of organization (= small scale: 1-n) with little or no division between labour and capital as factors of production; activities not necessarily performed with the deliberate intention of evading the payment of taxes or infringing labour or other legislation (vs. underground economy) (15th International Conference of Labour Statisticians: ILO Official Bulletin 1993)
March 11, 2010 7
2. The Urban Informal SectorImportance of informal
Employment
March 11, 2010 8
3. Rural to Urban Migration Harris-Todaro Model
High rates of migration are outcomes of rural urban imbalances. Migration proceeds in response to urban-rural differences (returns minus costs) in expected income rather than actual earning
= Migration responds positively to bothhigher urban wages andhigher urban employment opportunities (= probabilities). The probability of obtaining a city job is inversely related to the urban unemployment rate.
Migration rates in excess of urban job opportunity growth rates are rational.
March 11, 2010 9
3. Rural to Urban Migration Harris-Todaro Model
March 11, 2010 10
3. Rural to Urban MigrationConsequences of the
HT model
Which would be the result of the creation of more urban modern-sector jobs?
Which would be the result of an expansion of formal education in the country?
What would be the effect of wage subsidies to increase labor-intensity of production? ... of efficiency wage rates to increase productivity?
How to overcome the “urban bias* / first-city bias”?* Michael Lipton, 1977
March 11, 2010 11
3. Rural to Urban MigrationConsequences of the
HT model
Create a urban-rural balance Expand small, labor intensive (rural) industries Eliminate factor-price distortion Choose appropriate technologies Modify the linkage between education and employment Reduce population growth Decentralize authority
March 11, 2010 12
3. Rural to Urban Migration Quizz
http://wps.aw.com/aw_todarosmit_econdevelp_10/85/21785/5577112.cw/index.html
Development EconomicsVI
Prof. Dr. Hans H. Bass
Jacobs University, Spring 2010
March 11, 2010 14
Development Economics Agenda March 11
1. Health and Education in Economic Development2. The Human Capital Approach to Health & Education3. Educational Systems and Development
March 11, 2010 15
1. Health and Education in Economic Development Health and Education
Health and education are important objectives of development and also important components of growth and development (dual role)
Greater health capital may improve the returns to investments in education and vice versa
Increases in income often do not lead to substantial increases in investment in children’s education and health significant market failures in education and health require policy action
March 11, 2010 16
2. The Human Capital Approach to Health and Education Age-Earning Profiles
March 11, 2010 17
2. The Human Capital Approach to Health and Education The Basics
Initial investments in health or education lead to a stream of higher future income
The present discounted value of this stream of future income is compared to the costs of the investment
Private costs and returns to education have to be compared to social costs and returns
March 11, 2010 18
2. The Human Capital Approach to Health and Education Graphic representation
March 11, 2010 19
2. The Human Capital Approach to Health and Education
Rates of Return to Investment in Education
March 11, 2010 20
3. Educational Systems and DevelopmentSupply and demand for
education
demand for high-wage employment in the modern sector (depends on wage differental plus probability to find a job) derived demand for education(often unrelated to non-economic criteria)
supply of education:often unrelated to economic criteriafixed by government expendituresinfluenced by aggregate private demand
March 11, 2010 21
3. Educational Systems and Development
Private and social costs and returns to investment in
education
March 11, 2010 22
3. Educational Systems and DevelopmentLorenz Curves for
Education
March 11, 2010 23
3. Educational Systems and DevelopmentGini Coefficients for
Education, 1990
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