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8. The Urban Economy Transformed
Pages 300-354

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From page 300...
... As urban population projections make clear, the urban economies of many developing countries are facing an unprecedented challenge to generate a sufficient number of new jobs at reasonable wages to absorb a growing and bettereducated labor force. The purpose of this chapter is to examine several of the critical elements in the nature of urban labor supply and employment.
From page 301...
... Unemployment and poverty in urban labor markets in developing countries are often attributed to labor market failure, but our review highlights how the differences between labor markets in high- and low-income countries have probably been overemphasized. Economists are now reexamining the structure of wages and earnings within urban labor markets in low-income countries to assess more carefully the role of human capital and institutional factors in determining earnings.
From page 302...
... The penultimate section of the chapter examines international facets of urban economies, factors that doubtless will increasingly condition urban labor markets in developing countries in the future and affect their labor absorption capacity. We present evidence on the urban implications of foreign direct investment, discuss the role of globalized networks of high-end business services, and examine how heightened exposure to world markets with their attendant benefits, costs, and uncertainties can affect the lives of urban residents disproportionately.
From page 303...
... Second, because the size of the urban informal sector tends to be poorly measured in national income accounts we discuss the informal sector later in this chapter there is reason to think that the urban share of the national economy may often be underestimated. One study of West Africa reconstitutes the production and trade flows of 1960 by applying social accounting matrix techniques (sour, 1994~.
From page 304...
... Neutral or "balanced" technical change which enhances the productivity of both agricultural and manufacturing activities to the same extent acts much like an increase in average national income and exerts an influence on relative demands for labor through Engel effects. Unbalanced technical change, in which faster progress is made in manufacturing than in agriculture, is expressed in labor markets by faster growth in the demand for manufacturing jobs.
From page 305...
... in which prices are determined largely in domestic markets. In the latter case, technological progress continues to exert some influence on urban population growth, but this influence is mild by comparison with the price-taking open-economy case.
From page 306...
... All this notwithstanding, however, one finds surprisingly little research in which urban savings rates are compared directly with rural rates.5 Indeed, the recent evidence suggests that the savings rates of rural households may well be higher than urban rates. In analyses based on cross-national datasets, Loayza, Schmidt-Hebbel, and Serven (2000a,b)
From page 307...
... Unfortunately, the data available to Kraay did not include savings among urban temporary migrants, who undoubtedly save higher fractions of their income than do permanent residents. If a household's educational expenditures were considered alongside its monetized savings, might this broader view show that urban savings rates rival rural rates?
From page 308...
... Localization economies arise when spatial concentration gives firms easier access to industry-specific inputs, such as specialized labor or services. Urbanization economies stem from the need for inputs used across industries and sectors, such as generalized legal and financial services and well-educated labor.
From page 309...
... In high-income countries, transportation costs have greatly declined as a share of total costs, and this has weakened one rationale for spatial concentration (Quigley, 1998~. In most poor countries, however, transportation and communication costs surely remain high.
From page 310...
... Spatial concentration and growth: Dynamic elements Over the past decade, the dynamic effects arising from agglomeration have attracted an increasing amount of research attention. The surge of interest is often dated to the emphasis on scale and externalities in new theories of economic growth (Lucas, 1988)
From page 311...
... Only a third of the industries studied show significant urbanization effects (as measured by the urban population of the state)
From page 312...
... empirical findings to conclude that urban spatial concentration must be one cause of national economic growth. it The size of its contribution is not yet known but is surely of considerable significance.
From page 313...
... i2Again a control variable the growth rate of the country's total urban population is introduced to convert the results to relative terms. See Chapter 4 on the United Nations procedures for estimating city-specific population growth rates and the possibility of measurement errors in these data.
From page 314...
... , in which the organizing concepts are those of localization and urbanization economies. As discussed above, firms benefiting from localization economies can reap productivity advantages from spatial clustering with other firms in their industries.
From page 315...
... The cost of conveying finished goods to consumers is a main determinant of the spatial clustering of firms. As firms and their labor forces gather around any one location, the consumer market associated with that location expands, and this, in turn, raises its attractiveness for other firms.
From page 316...
... Reviews of urban change often highlight how many of the most rapidly growing urban centers are found in areas where the value of agricultural production is increasing most rapidly (Manzanal and Vapnarsky, 1986; Hardoy and Satterthwaite, 1988; Blitzer, Davila, Hardoy, and Satterthwaite, 1988; UNCHS, 1996~. Among the most important factors are the value per hectare of the crops (the higher the value, generally the more local urban development occurs)
From page 317...
... Where statistics are available on occupational structures within smaller urban centers, they often show a significant proportion of the labor force working in agriculture, livestock, forestry, or fishing. The panel found no recent studies on occupational structures in smaller urban centers.
From page 318...
... The spatial concentration of urban populations allows economies of scale and scope to be exploited in urban infrastructural investments, and these economies are not readily captured in dispersed rural settings (Becker and Morrison, 1999: 1722; Montgomery, 1988~. Investing in such rural infrastructure as irrigation, transportation, and agricultural extension can improve rural productivity, reduce food costs, and allow labor to be released for urban occupations.
From page 319...
... The "quantity-quality transition" is a central mechanism in economic development: it ultimately produces slower labor force growth and higher levels of human capital per worker. The logic of supply and demand prompts doubt, however, about whether high returns to schooling can be sustained (Fallon and Layard, 1975; Montgomery, Arends-Kuenning, and Mete, 2000~.
From page 320...
... Bigsten, Collier, Dercon, Fafchamps, Gauthier, Gunning, Isaksson, Oduro, Oostendorp, Pattillo, Soderbom, Teal, and Zeufack (1998) , having access to rich longitudinal data on workers in manufacturing firms in five countries (Ghana, Cameroon, Kenya, Zambia, and Zimbabwe)
From page 321...
... , but the decline here was about the same as elsewhere. There is no evidence that urban rates of return were depressed by labor force growth the declining rate of return is almost entirely a phenomenon of the 1990s, by which time labor force growth rates were themselves on the decline (Lam and Dunn, 2001: 17~.
From page 322...
... Although much of the attraction of urban areas for migrants lies in the prospects for upward economic mobility after arrival, very few studies have examined urban income dynamics with the appropriate longitudinal data. Hence, 20Thorough reviews of the migration literature in economics include Yap (1977)
From page 323...
... and Harris and Todaro (1970) , who argue that in an important segment of the urban labor market the so-called "formal sector" wage rates are institutionally determined and set at levels too high to clear the market.
From page 324...
... specify p to be a function of the stock of urban employed relative to the full urban labor force. The Todaro approach assumes that once a formal-sector position is assumed, it can be held indefinitely; the Harris-Todaro approach, by contrast, depicts the urban labor market as being a kind of job lottery with wholesale turnover in each period.
From page 325...
... There are instances in Egypt, for example in which government hiring rules appear to exert a disproportionate influence on urban labor markets.25 But in many countries, prolonged weak economic performance has created pressures on government budgets, making it increasingly difficult to finance their large public-sector wage bill. Consequently, public workforces have been maintained only by allowing salaries to decline.
From page 326...
... The view that urban labor markets are separable into formal and informal sectors, with the formal sector offering high wages and long tenure and the informal sector low wages and insecure employment, is now recognized as simplistic and in need of substantial reappraisal. We return to the issues later in this chapter.
From page 327...
... In the proreform era, a rural migrant could not gain access to urban employment, education, or social services without first obtaining a nonagricultural registration from the local urban government. When economic reforms began to stimulate new economic activities in Chinese cities, resulting in an increasingly diverse employment structure only a part of which fell under government control, the possibility of wage rates alone would indicate that urban informal workers are poorer than rural residents.
From page 328...
... . Temporary migrants are somewhat handicapped in securing better jobs because they lack the social networks that help longer-term residents gain access to information and obtain recommendations.
From page 329...
... Urban Economic Mobility Surprisingly little research has explored urban economic mobility using data with a longitudinal dimension. In part this is because longitudinal data are generally uncommon.
From page 330...
... increased the likelihood of upward mobility in relative terms.3i Among the urban residents, men with greater education were found to be less likely to experience relative income decline over the period; as in the case of urban Peru, education appears to provide some protection against downward mobility. 30The latter is a bivariate result, which weakens when multivariate controls are introduced.
From page 331...
... THE INFORMALIZATION OF URBAN LABOR MARKETS As we have seen with regard to migration, the proposition that the urban economy can be divided into formal and informal sectors has attracted an enormous amount of research attention over the past 30 years. Doubt has been cast on a number of 32It has long been recognized that cross-sectional studies of migrant earnings by duration of stay are vulnerable to selectivity bias in that those migrants who have been successful are probably more likely to remain.
From page 332...
... In the ILO definition, the informal sector comprises the self-employed, those who are working in firms with fewer than five employees, workers with no registration, owners of a family business with fewer than five employees, and family members working in a family business without a specified wage.36 This classification assigns to the formal sector all government employees and both the owners and employees of large firms. 34Initially inspired by Hart's 1973 work in Ghana, the concept of an informal sector gained popularity in the 1970s, thanks to the efforts of the International Labour Office's World Employment Programme and affiliated researchers (for example, Bromley and Gerry, 1979)
From page 333...
... provides estimates of the share of the urban labor force working in the informal sector for a number of cities in the late 1970s. 38These are upper-bound estimates for Kyrgyzstan because some informal-sector participants maintain nominal formal-sector job status to retain eligibility for benefits, and many outside the official labor force have informal-sector occupations.
From page 334...
... The likelihood of exiting formal salaried employment declines with education (not shown) , suggesting that the better-educated BOX 8.3 Does Urban Population Growth Swell the Informal Sector?
From page 335...
... , who expresses doubt about dualistic characterizations of urban labor markets in Mexico. Tybout (2000)
From page 336...
... compares earnings in the informal sector with those in public and private formal-sector jobs. Informalsector work provides an income premium relative to the private formal sector, perhaps because it gives a greater return to entrepreneurial abilities.
From page 337...
... But the informal sector also contains what might be termed an "upper tier" of individuals and enterprises whose net earnings appear to exceed those of formal-sector occupations. The formal sector is itself heterogenous and difficult to characterize, with public-sector employment offering a wage premium in some settings but not in others (Lucas, 1997: 762~.
From page 338...
... In short, while the "lower tier" of the urban informal sector may have been the recipient of substantial inflows from the formal sector and elsewhere, with earnings thereby deteriorating, other segments of the informal sector may well have been revitalized and linked profitably to domestic and even international partners. If in an earlier era the urban economy could be depicted as divided along the lines of formal and informal sectors, today there is an increasing appreciation of the polarization taking place within the informal sector itself (see Crankshaw and Parnell 2003, for the case of Johannesburg)
From page 339...
... . The continued vitality of the informal sector will depend on access to reliable public services and infrastructure (water, electricity, communications, road networks)
From page 340...
... To examine both inter- and intracity inequality, Lam and Dunn (2001) exploit a 20-year series of large labor force surveys for Brazil, covering the period 1977 to 1999.
From page 341...
... The high inflation of the late 1980s played a role in the rising trend, but that trend must also reflect the increasing heterogeneity of Brazil's urban labor markets discussed earlier (see Box 8.2 for Sao Paulo)
From page 342...
... However, two related factors partly offset this effect: the variance of women's earnings is smaller than that of men, and the male-female earnings gap has begun to close. Higher returns to schooling in urban labor markets have also increased the variance of earnings, but higher schooling attainment has tended to decrease it.
From page 343...
... THE FUTURE OF URBAN LABOR MARKETS: GLOBAL LINKS AND LOCAL OUTCOMES The increasing speed and depth of international communication and economic exchange will surely have profound consequences for the cities of poor countries. But these countries differ greatly in the extent to which their economies are exposed to such forces: a few are rapidly dismantling barriers to trade and investing heavily in communications infrastructure, others are proceeding at a more
From page 344...
... Finally, we explore what is known about the risks and economic volatility to which urban populations are exposed as they engage more fully with the international economy. Foreign Direct Investment As Douglass (1997)
From page 345...
... Indonesia began to reconfigure its development strategies to emphasize export-oriented manufacturing, an activity in which its newly literate labor force might prove attractive to foreign investors. The country soon became a favored site for Japanese investment.
From page 346...
... The globalization of finance; the growth of transnational investment; the spatial dispersal of factories, service outlets, and offices; and the creation of facilitating information technology all have contributed to a demand for specialized business services (Roberts, 1994; Hampton, 1996; Bagchi-Sen and Sen, 1997; Bowe, 1998; McKee, Garner, and McKee, 2000~. As discussed in Chapter 2, high-end business services can be viewed as complex bundles of inputs.
From page 347...
... The internationalization of informal sectors is also tied to growth in transnational organized crime. Prostitution, child trafficking, smuggling, and arms dealing are now globalized phenomena.
From page 348...
... As countries negotiate their way toward liberalization and a deeper engagement with world markets, they adopt adjustment policies that mediate the effects of international markets and cause these effects to impinge differently on rural and urban populations. A number of African countries, for instance, have eased marketing restrictions and lifted price ceilings on agricultural goods, thereby removing much of the bias against agriculture that was so prominent in the 1970s (Collier and Gunning, l999b)
From page 349...
... studied the price effects associated with this crisis and found that contrary to what is often thought, the very poor do not occupy niches in the urban economy that are somehow sheltered from international economic shocks. Indeed, increases in the cost of living during the crisis were greatest for the urban poor, somewhat smaller for the urban nonpoor, and smaller still for rural households.
From page 350...
... In rural Indonesia, the self-employed (mainly farmers) appear to have been left largely unaffected by the Asian financial crisis, and rural family incomes tended to fall less than wage rates, probably because rural households could activate multiple coping strategies.
From page 351...
... Between 1989 and 2000, Bishkek added about 130,000 people, while the secondary cities of Kyrgyzstan lost 55,000 residents (Government of the Kyrgyz Republic, 2000~. Levels of poverty in Bishkek have been low in comparison with rural rates and those of other cities, and its wage rates have been relatively high even when adjusted for differences in human capital (Anderson and Becker, 2001~.
From page 352...
... Yet our review has highlighted the considerable uncertainty that surrounds the functioning of urban labor markets in these settings. Urban economies have changed greatly since the formulation of the highly influential models of Todaro (1969)
From page 353...
... However, studies of migrants based mainly on cross-sectional surveys that may overrepresent the more successful migrants generally show that rural migrants undergo a period of adjustment to city life during which their earnings are low, but subsequently achieve earnings levels that rival and sometimes exceed those of urban natives. Recommendations Given the partial nature of this review, it is impossible to formulate a list of specific research recommendations on the relationship between population and labor force growth and labor absorption.
From page 354...
... The spatial effects are not always focused on cities, however, and urban residents also draw considerable benefits from exposure to world markets. Nevertheless, as globalization proceeds, more research will be needed on both the costs and benefits to urban residents of their increased exposure to world markets.


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