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Urban Migration And The Informal Sector

2498 words - 10 pages

‘Migration into cities has resulted in the rise of the informal sector rather than transforming the urban space into an industrial site.’
Discuss the reasons for this seemingly perverse phenomenon using examples from any two countries.

Starting from the late 18th century, the Industrial Revolution led to an incontestable migration from the countryside to the city as industries agglomerated in the centre of Western cities. A century later, as industrialization gained what is known as the developing world, classical economists such as Lewis predicted large waves of migration that would transform the urban space into an industrial site. Yet, the most noticeable phenomenon of migration ...view middle of the document...

Industries primarily locate in urban areas to be closer to transport networks and input or output markets, as well as to access a larger pool of labour1. The agricultural wage is set the average product of labour where marginal production is nil (WA). Thus, wages are higher in industrial urban areas, and the wage gap pulls the labor force towards cities until an equilibrium wage is reached
Weq = WA = WM, at which point the migration stops.
The unproductive agricultural sector implies that it contains a significant labour surplus, which in turn allows Lewis to assume that industrialists face a perfectly elastic supply curve SL. Accordingly, firm managers can increase profits by reinvesting their surplus (WMFD1) into more capital, producing at point G and earning (WMGD1). With time, the urban space industrialises and more jobs are created (moving from L1 to L3 onwards).
The model also predicted that developing countries like Ghana and Pakistan would have a flourishing urban industry, thanks to their large agricultural labour surplus, and post-war investment attracted by the relatively more developed infrastructure left by their imperial power as compared to other colonies. However, over the past century, the economy of both countries, just as of most developing countries, has been characterised by the rise of an informal sector.

Development economists initially considered this as a perverse phenomenon. The first explanation could have been the halt or drop in growth rate that took place in countries like Ghana and Pakistan from the late 1960s. In fact, former colonies aimed for self-sufficiency to secure the independence gained in the years following 1945, and developed what is known as Import Substitution Industrialization. Ghana and Pakistan, who were among the first colonies to gain independence in their respective region, heavily invested in the production of goods for which they were at a competitive disadvantage such as steel or wheat, and these industries collapsed as international trade gained prominence. Moreover, even where industrialisation took place, Lewis’ assumption that industrialists duplicate their production process did not always hold: they also invested in production processes that required less labour, effectively increasing the slope of the labour demand curves (D1/2/3) and causing a reduced labour demand.3 Hart underlines that the problem is not always a shortage of formal sector jobs, but rather a collapse of the real wage that they offer, mainly due to a rise in living costs. In this way, the Ghanaian worker overburdened by food prices in 1960s, on top of rent, preferred to move into the informal sector (Hart, 1973).

Following the Lewis’ model, and assuming costless travel to and from the city, migrants without jobs would immediately return home. However, in practice, these costs oblige migrant workers to work informally for survival (Fields, 2004). In this job-scarcity scenario, education becomes key: only...

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