Although rapid urbanization in the Third World has been accompanied by an increase in urban poverty and unemployment, urbanization is the product of economic development, which also reduces poverty and increases living standards. Developing economies face low productivity and low income, which are the primary causes of unemployment and povery in the Third World. Urbanization improves the over-all economy of the country, but exacerbates urban inequalities.
Urbanization and industrialization are the consequences of economic development because of a positive relationship between urbanization, manufacturing, and economic development. The manufacturing industry benefits from economies of agglomeration, simply stated, because industries “benefit from the concentration of suppliers and consumers, which allows savings in communications and transportation costs.”(Oberai 109) Economies of agglomeration are beneficial for the following reasons: (1) Industries benefit from the availability of infrastructure that rural areas lack. Urban areas have access to electricity, water, telecommunications, airports, etc. (2) In addition, urban areas benefit from the availability of specialized business services, such as banks, financial offices, consulting services, professional schools, etc. (3) Because urban areas tend to have a higher levels of education, urban areas also tend to have a larger number of skilled workers. (4) The large-scale operation of one firm lowers costs and improves efficiency, which in turn reduces the cost inputs for other firms, creating a virtuous cycle. (5) Finally, large metropolitan areas tend to be centers of the business, intellectual, and political elites that attract industry.
Because industry benefits from urbanization, many cities in the Third World generate a large proportion of the GDP and contribute significantly to overall economic growth. In Brazil in 1970, the population of Sao Paolo made up only 8 percent of the national population, but contributed 36 percent of GDP. The population of Mexico City made up only 14.2 percent of the national population in 1970, but contributed with 33.6 percent to the country’s overall personal income. Finally, in China, the population of Shanghai accounts for about one percent of the total population but contributed to one-eighth of GDP in 1980. Therefore, the urban population is responsible for a larger proportion of economic growth and development.
Initially, mega-cities benefit from economies of scale, but eventually the gains begin to diminish as the population of the city increases. The population growth in major cities in the developing world today is more a result of natural increase then of rural-urban migration. In the beginning stages of development, the urban population increase is attributed to large migrations from rural areas to urban areas. After World War II, rural-urban migration produced the urbanization of the developing countries today. Developing countries experienced high population growth as death rates fell, as a result of medical advances, while fertility remained high. The rapid natural increase in the rural areas produced an excess supply of labor in agriculture. Due to the incentive to migrate to the cities for work, plus reduced possibilities of international migration, rural-urban migration increased rapidly. In the intermediate stage, where the developing world is today, an increase in the urban population results from high natural rates of increase from high fertility rates among urban dwellers. “The most recent evidence…indicates that in general about two-thirds of the increase in the population of the large cities in the developing countries comes from natural increase.”(Singh 31) Finally, in the advanced stages of development, population increases once more is the consequence of migration. (Oberai 108)
According to the neo-classical model, rapid population growth usually increases capital depreciation, and thus, decreases investment. “Instead of becoming ‘engines of development’, cities are heading for total breakdown.” (Singh 15) With an excess supply of labor, if the capital stock does not increase, the economy will adjust by lowering wages or increasing unemployment. Labor markets have been divided into “formal” and “informal” labor markets, in which the informal sector “usually refers to ‘unprotected jobs outside the preview of labour legislation on minimum wages, health, safety, and other benefits.” (Singh 33) Surprisingly, unemployment is not just a problem faced by the informal sector, but it is experienced in the formal sector as well. One adjustment to an increase in the labor supply or an economic downturn is a shift of jobs from the formal sector to the informal sector, disguising unemployment as an increase in informal sector employment. For this reason, the informal sector grew much more than did the formal sector during the 1980’s, when the developing world was experience the effects of the world economic crisis. Research suggests that there is a positive relationship between poverty and employment in the informal sector. In other words, the proportion of workers in the informal sector that are poor is higher than that in the formal sector.
Within one city, there is large wage disparity among workers based on education levels and discrimination. A positive relationship between better educations, better access to job opportunities, and higher incomes is evident. The International Labor Organization (ILO) found in their research in the Philippines and in Panama that a lack of access to secondary schools was the main factor in explaining poverty. (Singh 35) In addition, the study illustrated that in Calcutta levels of consumption were a function of the level of education received. There are two possible explanations for this phenomenon: difference in productivity levels and difference in attractiveness to employers. A difference in education may also translate into skill level and productivity. Thus, workers with low levels of education would be less productive and more likely to earn less. The second explanation suggests that a higher level of education, though it may not necessarily translate into a higher level of productivity, is likely to be required by employers as a screening device, perpetuating the cycle of poverty. In addition to education disparities, discrimination plays a significant role in urban labor markets in developing countries. Discrimination on the basis of sex, age, and ethnic origin obstruct many people from entering the formal employment sector. Although, the existence of a large informal sector may suggest “disguised unemployment,” this sector may still provide the only means for women, ethnic minorities, and the less educated to participate in the economy.
Slums and squatter settlements are the most visible sign of urban poverty and decay, and they are related to the large informal sector in Third World cities. Low levels of income in the informal sector are not sufficient to meet the high cost of living in those cities. Because land is scarce and the population is increasingly dense within the cities, land prices are high. The inequity in the labor market between the formal and informal sector is further accentuated in the housing situation, “by limiting the access of informal sector workers, particularly migrant workers, to housing and land.”(Oberai 113)
Fertility rates have remained high in urban areas because the urban poor have low incomes and little access to family planning services. Besides housing, the urban poor have limited access to even basic social services, such as education, health, and family planning. Because the increase in urban population is most closely linked to high natural rates of increase, as mentioned earlier, targeting fertility rates is the first step improving population pressures. Increasing access to family planning services and other social services, in addition to increasing employment opportunities for the urban poor are likely to reduce fertility and slow the rapid population increase.
Although the increasing size of major cities is a cause for concern, there is no unique city size limit, which indicates when the disadvantages of urbanization outweigh the benefits. Economies of agglomeration clearly illustrate the gains from urbanization, but to what point? The alternative to urbanization would be decentralization, which would scatter industries throughout the country. The advantages gained from the efficiency of economies of agglomeration would be lost. If the already scarce capital resources were wasted, overall economic growth would slow down. In the long run, poverty would become an even more serious problem, as productivity would decline.
The overall productivity and the efficiency within urban areas must be the focus of any effort to decrease urban poverty and unemployment. “That is why policies designed to improve the internal efficiency of the largest cities, must be vigorously pursued and not side-stepped in the name of decentralization.”(Singh 31) In order to reduce the problems of urbanization, policies must focus on improving the productivity and incomes of the urban poor.
A. S. Oberai, "Population Growth, Employment and Poverty in Third World Mega-Cities", in Proceedings of the International Population Conference Montreal, 1993, Vol. 2, pp. 105-119.
Ajit Singh, "Urbanization, Poverty and Employment: the Large Metropolis in the Third World", Contributions to Political Economy, Vol. 11, 1992, pp. 15-40.