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

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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

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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

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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)

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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)

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2. The Urban Informal SectorImportance of informal

Employment

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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.

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3. Rural to Urban Migration Harris-Todaro Model

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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

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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

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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

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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

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2. The Human Capital Approach to Health and Education Age-Earning Profiles

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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

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2. The Human Capital Approach to Health and Education Graphic representation

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2. The Human Capital Approach to Health and Education

Rates of Return to Investment in Education

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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

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3. Educational Systems and Development

Private and social costs and returns to investment in

education

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3. Educational Systems and DevelopmentLorenz Curves for

Education

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3. Educational Systems and DevelopmentGini Coefficients for

Education, 1990