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St Edmund Hall
Are high rates of migration from rural to urban areas and the fast growth of the
informal sector in developing countries signs of failure or success?
The prevalent tool used to analyse the process of development in a labour abundant
economy is the Dual Economy Model, originally developed by Lewis in 1954, and
added to by Frei and Ranis in 1964
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e
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In turn, this raises the aggregate savings rate and accelerates
the rate of growth
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However, many countries, such as China and South Africa, have previously viewed
high migration rates as being so problematic that extreme measures have been put in
place to curb the process
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A side effect of migration is the rise of the informal sector, characterized
by low wages, poor living standards, and its contribution to high levels of pollution
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In this essay I am going to
discuss why migration happens in the first place, different views on its successes and
failures, and how the informal sector could be somewhat controlled through
government policy
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On the other hand, agricultural wages fluctuate with supply and
demand, and this flexibility means that they are typically much lower
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Migration is a response to the wage gap between the two sectors –
people who choose to migrate are taking the decision to leave behind a relatively sure
thing, the lower wages of the agricultural sector, for the great uncertainty of
employment as a higher paid formal labourer
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In order to avoid mass urban unemployment, which is seen as a failure, throughout
history various countries have attempted to block such migration
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However, Lall et al write that recent models have shown that migration is a
way to circumvent rural constraints, such as credit market/insurance imperfections,
and job-search models suggest that migration can improve job matches
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Remittances are spent on both consumption and investment,
enabling both short term increases in the standards of living and long term
development in rural areas
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Although, we must not treat the urban and rural sectors as being two separate and
polarized sectors of the economy, when in fact the effects of one sector can be crucial
to growth in another
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Ravallion and Datt found that the relative effects of
growth within and between each sector reinforced the importance of rural economic
growth to national poverty reduction in India – where urban growth had no effect on
rural poverty, rural growth had a significant impact on poverty in both sectors
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Britain may have had an industrial revolution before France
because its labour productivity in agriculture was 30% higher
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Aside from development levels and the reduction of poverty, a side effect of ruralurban migration is the growth of the informal sector
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However, it is often responsible for
congestion, pollution and a high crime rate, and leaves much of the urban population
surviving on extremely low wages with low living standards
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Fajnzylber et al (2011) write that the high costs of complying with government
regulations have often been seen as largely responsible for the presence of large
informal sectors in developing countries, and in order to reduce the size of the
informal sector, this is the problem that must be dealt with
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Licensing rates increased by about 50% between the three months
prior to SIMPLES and the three months that followed, and comparing the nine

St Edmund Hall
months prior and following, the incidence of licensing among eligible firms increased
from 20
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3%
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2% to 26
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Formalized
firms show significantly higher revenues and profits, and led to an increase in
employment of 0
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5 employees – a substantial increase in firms where they may
have previously only been one or two employees
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Formality
offers the firm access to risk pooling mechanisms that may attract more educated paid
workers and engage them in a longer relationship with the firm, making the
acquisition of training/capital goods more profitable
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Interestingly the biggest gain was thought to be through the choice of a
permanent location which permits the expansion of capital and employment,
essentially the issue of property rights, which was examined in Buenos Aires by
Galiani and Schargrodsky (2010)
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This could serve as another mechanism used to alleviate the issues of the informal
sector, as property rights could allow for expansion and formalisation, and therefore
increased employment in the formal sector
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In conclusion, I think overall high rates of migration from rural to urban areas is a
sign of success, as it shows a country beginning to industrialise and move away from
agriculture
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The fast growth of the informal sector is a natural
accompaniment to rural-urban migration, and its usefulness as a tool in controlling
and slowing the rate of migration leads me to believe it is not a sign of failure
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This combined with programs to deal with fragile property rights should
lead to both more formal employment today, and investment in buildings and human
capital for the future
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Ravallion and Datt (1996), How Important to India’s Poor is the Sectoral
Composition of Economic Growth?; World Bank Economic Review, 10(1), 125
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V
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and Shalizi, Z
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World
Bank Policy Research Working Paper 3915, May 2006
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, W
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Maloney and G
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Montes-Rojas (2011), Does Formality Improve Micro-Firm Performance? Evidence from the Brazilian SIMPLES Program
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Galiani and Schargrodosky (2010), Property rights for the poor: Effects of
land titling
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Ray, D
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