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Overview
Originally published in 1984.
The Princeton Legacy Library uses the latest print-on-demand technology to again make available previously out-of-print books from the distinguished backlist of Princeton University Press. These editions preserve the original texts of these important books while presenting them in durable paperback and hardcover editions. The goal of the Princeton Legacy Library is to vastly increase access to the rich scholarly heritage found in the thousands of books published by Princeton University Press since its founding in 1905.
Product Details
| ISBN-13: | 9780691612409 |
|---|---|
| Publisher: | Princeton University Press |
| Publication date: | 07/14/2014 |
| Series: | Princeton Legacy Library , #638 |
| Pages: | 294 |
| Product dimensions: | 9.10(w) x 6.00(h) x 0.70(d) |
Read an Excerpt
What Drives Third World City Growth?
A Dynamic General Equilibrium Approach
By Allen C. Kelley, Jeffrey G. Williamson
PRINCETON UNIVERSITY PRESS
Copyright © 1984 Princeton University PressAll rights reserved.
ISBN: 978-0-691-10164-4
CHAPTER 1
The Third World City Growth Problem
1. The City Growth Problem
The past quarter century has witnessed unprecedented economic progress in the Third World as gauged by the standards of history since the first Industrial Revolution in Britain. Economic success of that magnitude has always created problems of dislocation and structural adjustment, many of which are spatial. City growth is one such problem, and given the unprecedented economic progress in the Third World, their city growth problems, not surprisingly, seem to be unprecedented as well. By the end of this century, the United Nations forecasts urban population growth rates three times those of rural areas. Two billion people, exceeding 40 percent of the Third World population, will live in cities; some cities will have reached extremely large size — Mexico City at 31.6 million, Sao Paulo at 26 million, and Cairo, Jakarta, Seoul, and Karachi each exceeding 15 million. Current rates of Third World city growth border on the spectacular, averaging between 4 and 5 percent per annum.
Analysts and policymakers are sharply divided on the city growth problem. Pessimists stress the Third World's inability to cope with the social overhead requirements of rapid urban growth and high urban densities, citing environmental decay and planning failure as evidence of impending crisis. They tend to view Third World city growth as another example of the "tragedy of the commons," a classic example of overuse of a collective resource. In contrast, optimists view city growth as a central force raising average living standards. They view urbanization as the natural outcome of economic development, and a necessary requirement for the more rational use of economic resources. To the optimist, the tragedy of the commons is really nothing more than an example of poor economic planning and inappropriate prices. Debate over public policy options remains intense, the optimists favoring an open city approach, the pessimists searching for ways to close them down.
This debate is hardly new, and can be found as early as the 1830s in the British Parliamentary Papers, in treatises by political economists, and in the British press. Nothing ever changes, it seems, and we still don't have good answers to the question "what drives city growth?"
2. Setting the Stage
Cities are capital-intensive, a stylized fact that has led many pessimists to conclude that current rates of Third World city growth cannot be sustained. To make matters worse, cities are excessively capital-intensive, stocked as they are with public capital whose user charges are low or zero. It follows that since the social costs of in-migration exceed private costs, cities are created that are both too large and too many. To make matters "worse," increasing urban land scarcity encourages the substitution of capital for land, further increasing the cities' capital intensity. What happens when the national economy can no longer finance the cities' voracious appetite for saving and accumulation? So it is that pessimists stress the Third World's inability to cope with the social overhead and housing requirements generated by rapid urban growth.
Pessimists also stress that the Third World has "over-urbanized," a situation that will require painful structural adjustment in the near future. This disequilibrium view is based on the premise that migrants are attracted to the cities in the hope that they (or their children) will be selected for training and employment in the favored high-wage sectors. The disequilibrium view also believes that new immigrants accept underemployment in the (allegedly) low-wage traditional service sectors while waiting for more suitable employment. According to the pessimists, the new immigrants will wait only so long before social discontent erupts. Do labor markets in Third World cities really exhibit this kind of disequilibrium, and is the Third World over-urbanized as a consequence?
Pessimists also observe that the sources of past Third World urban "excesses" can be traced to the availability of cheap energy, technological diffusion from the developed world that favored modern urban sectors, heavy capital inflows, world trade liberalization, a drift toward domestic price distortions favoring city output, and unusually rapid population growth. These conditions now show signs of changing, suggesting that Third World countries may have over-urbanized in the recent past, at least based on likely future economic and demographic conditions. Thus, projected high rates of urban growth may not be reached over the next two decades, given further OPEC-induced fuel scarcity (cities being fuel-intensive); technological regression in modern sectors which have borrowed heavily from advanced countries (themselves now undergoing productivity slowdown); diminished capital transfers due to economic austerity in advanced countries; a retreat toward protectionism in industrialized countries; and retardation in economywide population growth rates.
In short, the pessimists offer three sources of an incipient urban crisis in the Third World: a savings constraint that will bridle the growth of capital-intensive cities; a labor market disequilibrium that has made over-urbanization a temporary, but serious problem of overshoot; and the disappearance of unusual external conditions that were favorable to urban growth in the recent past. While the pessimists have established a plausible case, no one to our knowledge has offered a quantitative assessment of the importance of these forces over the past two decades. Without such an assessment, debate over future Third World trends will be dominated by allegation and anecdotal evidence. It is our view that the debate can be better informed by the application of a general equilibrium model of Third World development which includes some of the costs of urbanization so that "natural limits" to urban growth can be evaluated, and the impact of changing economic-demographic conditions assessed.
3. What's Wrong with Our Models of Migration and City Growth?
Rapid city growth implies heavy rural-urban migration. Indeed, demographers have shown us that the more rapid the city growth, the more important is in-migration as a share of the city population increase. For that matter, the urban transition — epochs of first rising then falling city growth rates associated with long-run urbanization — has always been driven by changes in the rate of in-migration. What, then, do we know about migration itself?
The Rational Migrant in Partial Equilibrium
An enormous empirical literature on migration behavior in the Third World accumulated during the 1960s and 1970s. These studies offered explanations of migration by the application of partial-equilibrium models. The central issue in that stream of early migration research — led by the human-capital approach embodied in Sjaastad's (1962) classic contribution — was a test of economic rationality. Do Third World households respond to economic incentives in selecting employment locations? The answer was a resounding "yes," since earnings differentials consistently appeared as an important determinant of migration (Beals et al., 1967; Sahota, 1968; Yap, 1976b; Beier et al., 1976) in a variety of Asian, African, and Latin American labor markets. The postulate of rationality has been confirmed most recently by Gary Fields (1982) and T. Paul Schultz (1982), who deal with place-to-place lifetime migration in Latin America.
In 1969, Michael Todaro raised another issue, one that influenced much of the research in the 1970s, including the pessimists' view of city growth. If migrants are rational, why do "wage gaps" between urban and rural areas persist and why does migration to the city continue in the face of the (alleged) urban unemployment or low-productivity underemployment? To explain these apparent anomalies, Todaro offered a simple thesis: migrants do not respond solely to current earnings differentials but rather to expected earnings differentials. Expected earnings are conditioned by migrants' expectations of securing jobs in the favored urban formal sector. Debate ensued over the form of the expectations function as well as its empirical relevance, but the Todaro model quickly became the conventional wisdom underlying discussion of Third World urban labor markets. Obviously, it implies over-urbanization.
A key premise of this new conventional wisdom has been that the in-migrant accepts informal service sector employment (or, indeed, unemployment) at a wage below that prevailing in the rural area so that he may remain in the urban labor queue, hopeful for employment in the formal high-wage sector. Accumulating revisionist research has cast doubt on this premise. For example, Fishlow's (1972) work on Brazil, Bellante's (1979) on the American South, Merrick's (1973) on Belo Horizonte, and Mazumdar's (1976, 1979) on India, all suggest that observed nominal wage gaps are in large part a reflection of skill, age, sex, and occupational differentials, rather than wage gaps per se. Furthermore, Yap (1976a; 1976b; 1977) has shown that recent in-migrants to Brazilian cities do not have incomes lower than that which they would have received in the rural areas they vacated; they do not appear in informal sector employment with much greater frequency; and furthermore, they improved their relative income position very quickly after arriving in the city. Even more recently, Mohan (1980) has shown that underemployment in Bogota is not extensive and in any case not specific to recent in-migrants, that migrants are not poorer, and that the so-called informal sector is extremely hard to distinguish from alternative employment in the city. Similar findings can be cited for other countries, like India (Mazumdar, 1976, 1979).
Much of the research on Third World migration suffers from another flaw: rarely do empirical studies take adequate account of cost-of-living differentials. When they do, the cost-of-living indices almost always exclude rents, since they are so difficult to measure, especially in squatter housing. The exclusion is troublesome since rents rise with density and crowding, and thus cities, especially large ones, tend to have high rents. Nominal wage differentials therefore tend to overstate the advantage of city life. When cost-of-living differentials are included, much of the nominal gap disappears (Fishlow, 1972; Thomas, 1978, 1980; in contrast, see Meesook, 1974). Furthermore, it is the non-food component of cost-of-living that explains most of the differentials (Thomas, 1980, p. 89).
In addition, these migration studies seldom give serious empirical attention to urban amenities and disamenities, an issue that has been recently examined both for developed economies (Nordhaus and Tobin, 1972; Rosen, 1979) and for important historical cases like the British Industrial Revolution (Williamson, 1981). But little work has been done along these lines for Third World societies, which is certainly surprising given the general concern with the quality of life among the Third World urban poor (e.g., see Beier et al., 1976 and Linn, 1979, chaps. 3, 4, and 5). Such evidence is likely to be important in modeling the potential limits to urban growth.
Migration in General Equilibrium
If economic factors play a critical role in determining rural-urban migration, then urbanization and city growth are surely determined by those same factors. It follows that urbanization and city growth cannot be analyzed without explicit attention given to the interaction between rural and urban labor markets. Furthermore, those labor markets cannot be fully understood without explicit modeling of labor supply and demand forces in both the sending and receiving regions. In short, urbanization and city growth can only be understood by embedding the process in a general equilibrium model. This conclusion has slowly emerged over the past decade or so as economists and demographers have become increasingly sophisticated in their study of the sources of urbanization. Furthermore, we have learned that comparative statics are not sufficient to the task since it is now generally believed that while economywide growth influences the rate of urbanization, urbanization may also influence aggregate growth — an issue ignored in most urban studies except those that appeal to city-scale economies.
Based on the firmly held belief that the current structure of an economy — including urbanization levels — can influence its subsequent growth performance, macro models of Third World societies have stressed sectoral detail from the start. The classic examples are offered by the dual economy models pioneered by Lewis (1954), Fei and Ranis (1964), and Jorgenson (1961), the latter extended by Kelley, Williamson, and Cheetham (1972). Central to these models and their more elaborate extensions are the output gains associated with resource transfers from "traditional" low-productivity sectors to "modern" high-productivity sectors. Such resource transfers — labor migration in particular — have spatial implications, the most notable example being urbanization. In the classic labor surplus version, modernization (or urbanization) augments aggregate output both through short-run efficiency gains and long-run growth effects. In the short run, labor resources with low marginal productivity are shifted to high marginal productivity employment. In the long run, accumulation rates are raised since savings rates are higher in the modern sectors — indeed, in the extreme version only capitalists save, and capital is an argument in the modern, urban-based production functions only: "... rural-to-urban migration with its consequent dampening of urban wages, increases profits. Hence it leads to higher savings, investment, and output growth" (Stark, 1980, p. 97). Rising (urban) accumulation rates imply increased rates of modern-sector job vacancies, a rural-urban migration response, and further urbanization. Thus, output growth, trend acceleration, and increasing urbanization are the likely outcomes of the labor surplus model. The neoclassical dual economy makes the same prediction (Kelley, Williamson, and Cheetham, 1972; Dixit, 1973), at least for the long run.
What forces tend to inhibit the rate of ubanization in these dual economy models? Obviously the share in urban areas cannot exceed 100 percent. Thus, in the very long run, urbanization rates will slow down as this limit is approached and city growth rates will decline to the national population growth rate. But what about the medium term, perhaps a few decades hence? In the medium term, increasing labor scarcity is typically the only source of retardation in the rate of urbanization, even when such models are expanded for demoeconomic simulation (e.g., Tempo-II, Bachue, Simon, FAO, and KWC; see Sanderson, 1980). The rise in the real wage serves to choke off the rise in the saving rate, to reduce the rate of urban capital accumulation, to retard the rate of increase in new urban job vacancies, and thus to limit urban growth. The ultimate source of the limits to urban growth in models of this sort is agriculture, either through the disappearance of a rural labor surplus and/or through the rise in the relative price of agricultural products — the key wage good in such models.
Nowhere in this account are competing, and potentially voracious, urban "unproductive" investment demands on the national saving pool considered. In addition, while inelastic agricultural land supply insures an eventual constraint on urbanization through rising food costs and real wage increases, nowhere is the impact of inelastic urban land supply on city rents — another key wage good — and urban cost-of-living considered. Nor, for that matter, is there any concern with inelastic urban land supply on density, crowding, and urban disamenities. It seems to us that such models are poorly equipped to confront urbanization problems in the Third World. They say nothing about the costs of urbanization, and are equally silent on the possible limits to urban growth generated within the growing urban sector itself. If our understanding of Third World urbanization is to be enriched by macro modeling, existing multisectoral models must be revised to capture the potential impact of city costs on urban population growth through migration.
4. Limits to Urban Growth
How might our models of development be revised to better capture the costs of urbanization? If there are endogenous forces that tend to inhibit the rate of urbanization independent of overt anti-urban policy or unfavorable exogenous demoeconomic events, what are they? How potent might these forces be? Could they impose important limits to urbanization?
(Continues...)
Excerpted from What Drives Third World City Growth? by Allen C. Kelley, Jeffrey G. Williamson. Copyright © 1984 Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
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Table of Contents
- FrontMatter, pg. i
- Contents, pg. v
- Figures, pg. ix
- Tables, pg. xi
- Preface, pg. xv
- Chapter 1. The Third World City Growth Problem, pg. 1
- Chapter 2. Modeling Third World Urbanization and Economic Growth, pg. 13
- Chapter 3. Fact or Fiction?, pg. 74
- Chapter 4. How the Model Works: Short-run Impact Multipliers, pg. 100
- Chapter 5. Past Sources of Third World City Growth, pg. 125
- Chapter Six. Projections to the Year 2000, pg. 142
- Chapter Seven. Summing Up, pg. 178
- Appendix A. Mathematical Statement of the Core Economic Model, pg. 187
- Appendix B. The Representative LDC in 1960, pg. 203
- Appendix C. Dynamic Parameters, pg. 227
- References, pg. 249
- Index, pg. 267