Development Economics
V (cntd.)
Prof. Dr. Hans H. Bass
Jacobs University, Spring 2010
Development Economics
Agenda
Feb. 25 / March 11
1. Urbanization
2. The Urban Informal Sector
3. Rural to Urban Migration
March 11, 2010
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2. The Urban Informal Sector
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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
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2. The Urban Informal Sector
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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
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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
March 11, 2010
(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)
March 11, 2010
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2. The Urban Informal Sector
March 11, 2010
Importance 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 both
higher urban wages and
higher 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
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3. Rural to Urban Migration
March 11, 2010
Harris-Todaro Model
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3. Rural to Urban Migration
Consequences 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 laborintensity of production?
... of efficiency wage rates to increase productivity?
How to overcome the “urban bias* / first-city bias”?
* Michael Lipton, 1977
March 11, 2010
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3. Rural to Urban Migration
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Consequences 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
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3. Rural to Urban Migration
Quizz
http://
wps.aw.com/
aw_todarosmit_econdevelp_
10/85/21785/5577112.cw/index.html
March 11, 2010
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Development Economics
VI
Prof. Dr. Hans H. Bass
Jacobs University, Spring 2010
Development Economics
Agenda March 11
1. Health and Education in Economic Development
2. The Human Capital Approach to Health & Education
3. Educational Systems and Development
March 11, 2010
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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
March 11, 2010
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2. The Human Capital Approach to Health
and Education
March 11, 2010
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
March 11, 2010
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2. The Human Capital Approach to Health
and Education
March 11, 2010
Graphic representation
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2. The Human Capital Approach to Health
and Education
March 11, 2010
Rates of Return to
Investment in Education
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3. Educational Systems and Development
Supply 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 criteria
fixed by government expenditures
influenced by aggregate private demand
March 11, 2010
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3. Educational Systems and Development
March 11, 2010
Private and social costs and
returns to investment in
education
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3. Educational Systems and Development
March 11, 2010
Lorenz Curves for
Education
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3. Educational Systems and Development
March 11, 2010
Gini Coefficients for
Education, 1990
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