1. Common Features of Developing Countries

a. Income on a real per capita basis is 50 to 100 time larger in rich countries as in poor countries. A 1990 per capita income of $1,000 is similar to U.S. early 19th century income.

b. Income growth is relatively rapid, but much of it is eaten up by population growth.

c. Population growth is higher in low income countries than in high-income countries, although they slowed in all countries during the 1980s. Underdeveloped countries have younger populations with higher natural rates of population growth.

d. Urbanization is less in developing countries than in developed countries. The share of population that is urbanized correlates strongly with the level of economic development.

2. Why does the massive shift from agriculture to industry and services occur with urbanization?

a. The income elasticity of the demand for food is small, so that more income results in proportionally less spent on food and more resources available for manufacturing and services.

b. Product prices for manufactured goods and services may fall relative to agricultural prices with the accumulation of physical and human capital.

c. The advantages of relative price effects increase if the economy is open and trades internationally.

d. Industry and services are advantageously located in urban areas that permit scale and agglomeration economies and lower transport costs.

3. Implications of Urbanization

a. Projected growth in urban populations are inevitable in developing countries due to shifts from agriculture to urban functions If no growth in the rural sector is assumed then rapid urbanization is projected (see table 17.1 column 9). Urbanization is similar to 19th century developed countries but even more rapidly. Natural forces would slow the pace of urbanization with smaller family size once the skewed age distribution is eliminated.

b. Actual urban growth is less than projected (table 17.1 column 8) suggesting that agricultural population density is being pushed even higher and the pace of urbanization is being delayed. Policy makers favor a slower pace of urbanization to accommodate externalities and excessive spending on urban public services due to the concentration of urban poor.

c. If migration responses to higher expected real wages (less higher cost of urban life) then any urban premiums result in rapid rural-urban migration. Welfare is enhanced only if the flow of workers to the urban sector stops when the gap between the rural VMP and urban VMP is eliminated. Market signals are correct only if urban migrants pay all of the higher urban costs, including external costs of pollution, congestion, etc.

Externalities of urbanization may be more severe in developing countries than in developed countries due to excessive densities of urban population. It is doubtful that on efficiency or equity grounds that externalities are sufficient to warrant public restriction of rural-urban migration. Generally, all government programs to slow migration inevitably slow migration of predominantly poor people to benefit high-income residents.

d. Primacy or excessive size of the largest metropolitan areas (especially the capital city) is said to exist in developing countries Policy to restrict migration to the largest urban area is based upon the view that externalities cause net private benefits to exceed net social benefits, especially ignoring the effects of congestion and pollution costs. Countries with more centralized governments also have more primate rather than dispersed city size distributions. Decentralization of public service programs leads to more decentralized population centers. Local autonomy should be encouraged for local service demands if excessive size is a by product of economic development.

4. Poverty and Income Distribution

a. Low income countries contain mostly low income persons. Also urban income substantially exceeds rural income.

b. The Lorenz curve and the small Gini coefficient of developing low-income countries shows greater disparity in the distribution of income.

c. The Kuznets curve shows that at very low-level incomes economic development opens up job opportunities (mostly in urban areas and in certain industries) that only small groups receive. They have money to invest, education, skills, experience, and health to take part in growing sectors. In latter growth stages more persons can take advantage of higher paying occupations, capital becomes more plentiful, and labor productivity increases both due to physical and human capital investment. A more equal distribution of human and physical capital causes income levels to be less unevenly distributed. Government also takes an increasing role is redistributing income through progressive taxation and transfer payment, as well as public education and health care.

d. Land reform is the most widely publicized form of income redistribution in developing countries, but it requires strong government power. It tends to encourage urbanization as smaller parcels of land are combined for urban use.

5. Housing

a. Urban areas in developing countries are characterized by a housing shortage rather than a surplus of low-income housing that occurs in slow growing cities of developed countries. Filtering is almost nonexistent in developing countries. Low income people cannot acquire their housing at a below construction price in a "hand me down" market.

b. Low income residents in developing countries often live in the fringes in newer housing, frequently in illegal squatter settlements (rather than in older inner city housing of developed countries).

6. Slums and Squatters

a. There are millions of low-income squatters in low income countries living illegally (either on illegal land, in illegal quarters, or in structures that do not meet housing codes).

b. Most squatters are new comers who cannot afford legal housing and build whatever they can with scrap material and the help of friends. Some squatters locate because of ownership rights disputes or because it is cheap.

c. Government does not provide water or sewage disposal and lacks the power to enforce property rights.

d. Government responds the problem of squatters by ignoring, trying to remove, trying to relocate, or legalization. The evolution from illegal to legal status involves wealth redistribution from original owners and resource reallocation without a market transaction. Land may not go to its best use and there is little incentive for squatters to develop the land with durable structures that could be repossessed or destroyed.

Urbanization and Capital Investment Needs

a. Urban life requires more physical capital than rural life. Public provisions such as water, sewage disposal, roads, education requires spending before the benefits are fully realized.

b. Developing nations are debtor nations that borrow capital from more developed nations. They may also gain a competitive advantage over creditor nations in the long-run (US versus Europe). Developing nations may borrow technology and ideas at a lower initial cost and risk.