Appendix 3, Question 2
(a) What explanations have economists offered for the rural to urban migration in developing countries? [10]
Migration is the movement of people from one country to another country, or internally from one area in an economy to another and the settlement in the place to which they migrate.
One possible reason for migration is a difference between urban and rural wage rates. Increased manufacturing in urban areas causes there to be an increase in demand for labour in urban areas. This causes the demand curve to move outwards from D1 to D2. This brings about a rise in the equilibrium wage rate from W1 to W2 and an increase in the equilibrium employment level in urban areas from Q1 to Q2.
Labour in rural areas responds to this wage differential (W2-W1) by migrating from rural areas to urban areas, causing an increase in the supply of labour in urban areas from S1 to S2. This causes the equilibrium wage rate to fall from W2 to W1, and the equilibrium employment level to increase from Q2 to Q3.
Whilst there are examples of economies where wage rates in urban areas have fallen after an initial rise, such as China, Vietnam and Cambodia, this is not always the case. There are three factors that can stop this.
Trade union pressure on wage rates in the manufacturing sector may stop the wage rates falling.
Large multinational firms may pay higher rates so as not to face the exposure of "sweatshops" producing their goods, as companies like Nike have.
Domestic governments may impose minimum wage rates on workers.
If the wage rates remain at W2, a quantity QU of workers are willing and able to work, but firms are only willing and able to employ Q2 of workers at this wage rate. This therefore causes unemployment of Q2QU.
However migrants move for more than just the incentive of wage differentials. Michael Todaro’s theory says workers are motivated by the prospect of more job opportunities, better access to infrastructure such as clean water supplies, health care, education and tarred roads. Whilst in the short run migrants may suffer unemployment, they move because there is the prospect of greater lifetime earnings and a better lifetime standard of living and the prospect of advancement for their children through better or more education.(b) Discuss whether such migration is helpful to the process of economic development. [15]
Economic development in an economy is a broad notion of progress in social and economic conditions within a society and an improvement in all individuals standard of living.
Whilst the definition includes the material standards, self-esteem and freedom it is most easily measured quantitatively using either some form of national income statistic per head such as GNP per capita or a composite measure like the Human Development Index measured as calculated by the UN.
Migration undoubtedly brings many benefits both to the migrants and the economy as a whole. Firms have access to a larger pool of labour so the problems of unemployment mentioned in part (a) are less likely to arise. Workers are likely to gain new skills so become more occupationally and geographically mobile and will gain self-esteem at bettering themselves in the city.
Measured GNP or GDP is also likely to increase as subsistence activity in rural areas goes unrecorded. Activity in urban areas is much easier to monitor and record and workers moving from primary sector production to secondary or tertiary sectors generally increase the value of their output, and so the aggregate output within the economy.
However, such migration may hinder development: The equilibrium employment level and wage rate as explained in part (a) takes into account neither the external costs of additional migration nor of the effect that the loss of labour will have on the rural areas, as surely for a nation to develop the rural areas must also develop.
To take the first of these points, and consider the costs and benefits that towns and cities face as migrants move to them. As towns and cities grow migrants get benefits from moving to the city, but the bigger the city becomes the lower the marginal private benefits become. This means that later migrants have a lower marginal private benefit than earlier migrants, giving migrants a downward sloping MPB curve.
Marginal private costs are the costs that migrants themselves consider before choosing to migrate. For early migrants these are lower than for later migrants, and for later migrants the costs are higher (such as moving away from close family, friends and a better paid job for the later migrants compared to fewer social ties and a lower paid job or unemployment for the earlier migrants).
Migration continues whilst benefits are greater than costs for the individual migrant to the point where MPC = MPB, where migration stops as the cost of migrating is greater than the benefit gained by migrating to the migrant.
This can be represented diagrammatically as shown above. Failure to take into account the marginal external costs of migration such as pollution, congestion, increase in unemployment and a worse income distribution as migrants only take into account their MPC and MPB curves causes a population size of PA. This is higher than the optimum size for the town or city, PO, where MPB = MSC.
Therefore the free market causes too many migrants to move and for cities to grow too large leading to over population.
As mentioned earlier over migration causes a problem in rural areas, as there is a shortage of labour. The migrants who move to the cities also suffer as they as after a time their wages decrease until equal to those obtained in the rural areas and the benefits of a better infrastructure take a long time to develop living in shanty towns with longer periods of unemployment.
For those out of work the standard of living in an urban area is undoubtedly lower than in employment in a rural area, and individuals out of work do not help contribute to economic development, as they are not active in the production of goods and services within the economy. However in their lifetimes and almost certainly their children’s lifetimes on aggregate they will be more productive and have access to a better infrastructure than if they had remained in rural areas.
To conclude, every economy that has ever developed has undergone internal migration. Migration is an inevitable and necessary part of the development process.
These notes form a homework given in a lesson on 22/10/2004.
