Rural-To-Urban Migration in Developing Countries
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RURAL-TO-URBAN MIGRATION IN DEVELOPING COUNTRIES The Applicability of the Harris Todaro Model with a Special Focus on the Chinese Economy Dissertation zur Erlangung des akademischen Grades des Doktors der Wirtschaftswissenschaften an der Universit¨at Konstanz Fachbereich Wirtschaftswissenschaften vorgelegt von Karin Margarethe Bahns Tag der mundlic¨ hen Prufung:¨ 20. Dezember 2005 Referent: Prof. Dr. Albert G. Schweinberger Referent: Prof. Dr. Heinrich Ursprung In dankbarer Erinnerung an meinen Vater Dr. J¨orn Bahns (1940-1999) Zusammenfassung Die Arbeit untersucht die Anwendbarkeit des Harris Todaro Modells fur¨ Land- Stadt-Migrations-Prozesse in Entwicklungsl¨andern. Dabei geht es nicht nur um das Basismodel, sondern auch um die Modell-Erweiterungen, die internationalen Handel, einen st¨adtischen informellen Sektor und die Aspekte der Agglomeration behandeln. Die Folgerungen aus der Theorie werden sodann mit den empirisch belegten Erfahrungen einiger Entwicklungsl¨ander verglichen. Das Ergebnis be- weist, daß die dem Modell zugrunde liegenden Annahmen die Entwicklungen in vielen weniger entwickelten L¨andern wiederspiegeln. Die Konzentration auf die chinesische Wirtschaft erm¨oglicht eine tiefergehende Analyse der Anwendbarkeit des Harris Todaro Modells. Bereits vorliegende empirische Ergebnisse und die hier durchgefuhrte¨ Regressionsanalyse zeigen, daß das Modell auf China angewen- det werden kann. Es werden daher anschließend die politischen Implikationen er¨ortert. Zusammenfassend kann gesagt werden, daß das Harris Todaro Modell trotz einiger Unzul¨anglichkeiten in der Lage ist, die wirtschaftliche Entwicklung in China zu erkl¨aren und Leitlinien fur¨ die Implementierung politischer Optionen aufzuzeigen. Abstract The thesis studies the applicability of the Harris Todaro model to rural-to-urban migration processes in developing countries. The focus lies not only with the ba- sic model, but also with those extensions modelling international trade, an urban informal sector and agglomeration economics. The theory is then compared with the evidence from developing economies. It will be shown that the underlying assumptions of the model reflect the developments observed in many less devel- oped countries. Focusing on the Chinese economy allows an in depth study of the applicability of the Harris Todaro model. Previous empirical research, as well as the results of an estimation carried out by the author are used to prove that the model can be applied to China. Finally, policy implications are covered. Despite of some of the shortcomings of the theory, it can be concluded that the Harris Todaro model is able to explain economic developments in the Chinese economy and that it can give guidelines to the government on the implementation of policy options. Contents Contents i List of Figures iii List of Tables iv List of Abbreviations v INTRODUCTION 1 I THEORY 9 1 Setting the Scene 11 1.1 Definitions . 13 1.2 Market Segmentation . 14 1.3 Why do Workers Migrate? . 16 1.4 Information Channels . 22 1.5 The Effects on Origin and Destination Areas . 25 1.6 A Preview on Government Intervention . 28 2 The Harris Todaro Model 31 2.1 A Review of the Relevant Literature . 34 2.2 The Basic Harris Todaro Model . 40 2.3 The Extended Harris Todaro Model . 49 2.3.1 International Trade . 50 2.3.2 The Informal Sector . 56 2.3.3 Agglomeration Economics . 64 2.4 An Evaluation of the Model . 72 II EVIDENCE 77 3 Survey of the Empirical Evidence 79 3.1 Data Availability . 82 3.2 Survey of the Literature . 84 i ii CONTENTS 3.3 The Applicability of the Model . 87 4 The Chinese Case 89 4.1 Chinese Data . 92 4.2 A Short History of China . 95 4.3 The Structure of Chinese Production . 101 4.4 Chinese Wage Rates . 107 4.5 Rural-to-Urban Migration in China . 113 4.6 Chinese Rural Sector Development . 118 4.7 Agglomeration in Chinese Production . 124 4.8 The Urbanisation of China . 127 4.9 China and the World Economy . 130 4.10 Implications for the Chinese Economy . 138 5 A Study of the Chinese Economy 143 5.1 Survey of Empirical Studies . 145 5.2 Empirical Results . 147 III IMPLICATIONS 153 6 Chinese Government Policy 155 6.1 Gradualism . 157 6.2 Migration Restrictions . 159 6.3 International Trade Relations . 161 6.4 The Urban Sector . 170 6.5 Rural Development . 172 6.6 Environmental Concerns . 177 6.7 What lies ahead . 181 7 Conclusions and Lessons Learned 185 APPENDIX 193 A EViews Output 193 A.1 Regression Results . 193 A.2 Correlogram . 195 A.3 Unit Root Tests . 196 A.4 Heteroscedasticity . 201 Bibliography 205 List of Figures 2.1 Full Employment and Harris Todaro Equilibria . 46 2.2 Wage Subsidy to Manufacturing . 47 2.3 The Transformation Curve . 51 2.4 Production Tax-cum-Subisidy and Export Subsidy . 53 2.5 Production Tax-cum-Subsidy and First-Best Optimum . 55 2.6 Wage Subsidies . 67 iii List of Tables 2.1 Summary of Notations . 42 4.1 Employment by Sector in China . 103 4.2 City Sizes in China . 129 5.1 Regression Results . 151 iv List of Abbreviations ACFTU All-China Federation of Trade Unions CFCs Chlorofluorocarbons CGE Computed General Equilibrium CSY China Statistical Yearbook DSM Dispute Settlement Mechanism FAZ Frankfurter Allgemeine Zeitung FDI Foreign Direct Investment FTZ Free Trade Zone GATT General Agreement of Tariffs and Trade GDP Gross Domestic Product IMF International Monetary Fond LDC Less Developed Country NBS National Bureau of Statistics NTB Non-Tariff Barrier OECD Organisation for Economic Co-operation and Development PPF Production Possibility Frontier RMB Renminbi (English: People's Currency) SEZ Special Economic Zone SMOPEC Small Open Economy SOE State-Owned Enterprise SSB State Statistical Bureau TBT Technical Barriers to Trade TRIMS Trade-Related Investment Measures TRIPS Trade-Related Intellectual Property Rights TVE Township-Village Enterprise UNCTAD United Nations Conference of Trade and Development UNDP United Nations Development Program UNESCO United National Educational, Scientific and Cultural Organisation USD United States Dollar VAT Value Added Tax WTO World Trade Organisation v Introduction By migrating to urban centres, the ru- ral population is shifting from a higher level of hardship to a lower level of de- privation. (Maheshwari, 1995, p.259) INTRODUCTION 3 Today almost half the world population lives in cities. The number of people living in urban areas has risen steadily by around 1 million every year. According to a report from the United Nations Population Division (2003), the urban population is estimated to grow at 1.8 per cent per annum, while total population growth is projected to be 1 per cent annually. This would result in an urban population of 5 billion, or 61 per cent, by 2030. The rural population on the other hand is expected to decrease from 3.3 to 3.2 billion between 2003 and 2030. Large scale urbanisation is nothing unusual when viewing the history of the world. Previously, it has taken place in Europe during the industrialisation period. Today, however, most cities in developed countries grow very slowly and city size may even be reduced. As the population of an economy becomes more wealthy, many prefer to live in the cleaner and quieter environments of the countryside. Thus, employees need to commute into cities for work, for which the necessary requirements, such as public transport or individual car ownership, are only given in more developed countries. Cities in developing countries, on the other hand, still continue to grow. Only the pace is two to five times faster than it was in the European countries during industrialisation (Kojima, 1996, p.349). The population growth rate of most cities of at least 5 million in developing countries is greater than 3 per cent annually (Kojima, 1996, p.362). This growth rate is lower than 1 per cent in Europe and the United States (Kojima, 1996, p.362). The evidence further suggests that in countries with a Gross National Product (GNP) per head of less than USD 2,000 urbanisation rates range between 10 and 60 per cent (Kojima, 1996, p.350). Most countries in Africa and the Middle East face a population growth rate of at least 6 per cent (Kojima, 1996, p.356). Europe's urban population in comparison grew at a rate of 2.5 per cent or less during the period of industrialisation (Kojima, 1996, p.356). China used to be an exception to this rule with an urban population growth rate of between 1 and 2.7 per cent between 1960 and 1980 (Kojima, 1996, p.356). In 1961 there were only 208 cities in China with a total urban population of 121 million. This amounted to 19,3 per cent of the population (Zhou, 2004, p.446). Until the late 1970s the urbanisation rate even fell to 17.6 per cent (Zhou, 2004, p.447). However, these developments only occurred due to government policy. When economic reforms were introduced in 1978, the number of cities increased to 192 (Zhou, 2004, p.447). In the early to mid-1990s the growth rate of the urban population averaged around 3 per cent (CSY, 2003, table 4-1, p.97). Between 1995 and 1996 it rose to 6.1 per cent (CSY, 2003, table 4-1, p.97). The number of cities had risen to 668 by 1997 (Zhou, 2004, p.447). Today, the number of Chinese cities with at least 1 million residents has swelled to 174 (CSY, 2004, table 11-1, p.401). Overall, the share of the Chinese urban residents in the total population rose from 17.9 per cent in 1978 to 39.1 per cent in 2002 (CSY, 2003, table 4-1, p.97). This is equivalent to the percentages in the United Kingdom in the 1980s, in the United States in 1911 and to Japan in 1950.