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Is Urbanization the Cause of Unemployment and Poverty?

By Elizabeth Gamson

The world is becoming increasingly urban. Throughout the developing world, more and more people are migrating to cities in the search of new, more prosperous lives. Once they arrive in the cities, however, they realize that their lives there will not be as promising as they had expected. A large majority of them discover the pressing problems of overcrowding, poverty, homelessness, and unemployment. Statistics show that more than one-quarter of the inhabitants in most large cities are estimated to be living in absolute poverty, and the next decade will witness increased urbanization of poverty if current trends continue (Oberai, 106). In this paper, I will explore the degree of correlation between urbanization, unemployment, and poverty. I will first examine the causes behind the trend of urbanization. Specifically, I will examine reasons why poverty and unemployment are prevailing end-results of urbanization and answer the question: is urbanization the cause of Third World unemployment and poverty?

In general, there are three major sources of urban population growth: net migration, natural increase, and reclassification. According to A.S. Oberai, net migration and natural increase are the largest contributing factors to urban population growth. At an early stage of development, when levels of urbanization are low and rates of both urban and rural natural increase are relatively high, net migration generally contributes more to urban population growth than does natural increase. At an intermediate stage, since migrants are relatively young, fertility rates increase and death rates decrease and natural increase thus predominates. At a late stage, this trend reverses and with high levels of urbanization and low rates of natural increase, net migration contributes more to urban population growth (Oberai, 108).

Migrants typically move to urban areas in response to better employment and income opportunities. The nature and pattern of industrialization, the pace of agricultural development, and the growth of transportation and communications networks are therefore deciding factors influencing the rate of urbanization (Oberai, 109). Cities have become more attractive to rural migrants as economic development and trade are centered in urban areas and cities offer better job opportunities, amenities, and public services than villages and rural areas.

Theoretically, urbanization should lead to economies of scale, benefiting the workers of cities. The increase in the size of the urban population and work force should lead to a greater division of labor, increased specialization, easier application of technology, and mass production (Oberai, 61). Since a growing city naturally causes a greater demand for output of all products, this demand for higher output should bring about a falling unemployment level and thus higher bargaining power for workers. This ultimately translates into higher wages. Because of these higher wages, savings rates should then rise, and consequently there should be a higher availability of capital for private investment. This would again instigate further economic growth and the cycle would continue.

This scenario is far from being prevalent in the developing world. Third world cities are currently experiencing diseconomies of scale due to urbanization. Initially economies of scale increase rapidly as a city expands, but beyond a certain size the additional gains diminish rapidly. Current developing countries are evidence of this problem mainly because they are experiencing too rapid of urbanization. This is a key difference between the success of the urbanization process in the already industrialized countries and the less successful urbanization process of the developing countries. The World Bank highlights the differences:

Due to this too rapid of urbanization, there is insufficient capital so that developing countries are unable to capacitate these growing urban populations, thus leading to severe poverty and unemployment problems.

Besides developing cities growing at too rapid a sustainable pace, there are other reasons for the pressing poverty and unemployment problems throughout cities of the developing world. Unlike in present day developed countries, urbanization in the developing countries has largely taken place as a result of the low rural living standards and the consequential push of rural inhabitants into urban areas. After World War II, the developing areas experienced a rapid growing of its populations due to better health standards and imported medicines. The more rapid natural increase in rural areas led to population and labor force growth that could not be absorbed in the agricultural sector. In many rural parts of the Third World, population pressure and a much-reduced scope for international migration has contributed to the acceleration of rural-urban migration. Unlike present day developed countries, urban growth was not a response to increased productivity and higher standards of living. Rather, it has "aggravated problems of labor absorption and its effective use, contributing to growth of slums and to urban squalor" (Oberai, 62).

The economic recession of 1979-1982 also greatly increased poverty and unemployment in developing cities as it had a devastating effect on economic development in the Third World. On account of the oil shocks of the late 1970s and restrictive monetary and fiscal policies of the United States, much of the Third World suffered from a recession. Due to a reduction in the demand for Third World products, commodity prices began to fall, hence creating adverse movements in the terms of trade. This subsequently led to an increase in the real burden of interest and debt service payments. The amount of aid flowing into Third World countries also was greatly reduced during this time period, further exacerbating these problems (Singh, 22).

Ajit Singh concludes that empirical studies indicate that, in general, there is a negative relationship between economic growth and reducing poverty and unemployment. Urban areas are most immediately affected by economic slow-downs. For example, a balance of payment constraint, like that of which resulted from the 1979-1982 recession, creates a cut in imports of industrial raw materials and intermediate goods which in turn leads to lower levels of industrial production and capacity utilization, particularly in the urban sector. Singh claims that with the onset of the balance of payments crisis in 1982, industrial production fell by four percent in that year and by eight percent in 1983. In a country where "labor force is increasing at a rate of three percent p.a., instead of new jobs being created there were large scale lay offs and redundancies." This tremendous rise in the unemployment rate caused real wages to fall by approximately twenty-five percent. Sing also maintains that the balance of payment constraint and lower economic growth are also likely to lead to inflation, which often has a most unfavorable effect on low-level income groups in society (Singh, 23).

Urban diseconomies have the hardest effect on the lower-income groups, as they are least apt to escape them. The middle- and upper-income groups often have the resources and knowledge to move to different areas, command better public services, and influence political decisions. One would think social services such as education, health, nutrition, and family planning should be easier to provide in cities rather in rural areas because of their compact nature. However, resources for the poor of the developing cities are inadequate. Urban social services are misallocated in favor of the wealthier classes, further placing the low-income level classes into a "vicious cycle." Oberai describes this cycle as low income and large family size inducing poor education, health, and family planning which in turn leads to low productivity and incomes (Oberai, 113).

The workers’ low levels of income do not enable them to face the challenges of urban life. It is particularly hard for them to cope with the high cost of living in cities. The National Commission on Urbanization in India regards the proliferation of slums and squatter settlements in the urban areas as the "most visible manifestation of urban poverty and decay" (Singh, 21). In population dense cities, land scarcity leads to high land prices and speculation. In such situations, the "dualistic economic structure of the cities" in terms of employment further emphasizes the level of inequality by limiting the access of poor workers to housing and land. This therefore leads to the formation and growth of slums and squatter-settlements in large cities.

The United Nations defines absolute poverty to be the degree of poverty at which a person is unable to purchase necessary non-food products and unable to afford enough food to sustain adequate bodily nutrient levels (Singh, 20). According to United Nations data, over 300 million Third World urban citizens are in absolute poverty. These numbers are projected to increase substantially. For example, in Bombay alone, the estimated number of thirty million poor is expected to increase to over eighty million poor in the next fifteen years (Singh, 21).

These staggering projections confirm that efforts must be done to slow urban growth and improve the lives of the urban poor. Third World governments have begun to think about possible policies to curtail the growing spatial inequalities in their countries. Attempts have been made to restrict migration to cities through such measures as administrative and legal controls. These actions, however, have been for the most part unsuccessful. Other government measures include land settlement schemes, administrative and industrial decentralization, and rural development programs designed to enhance the attractiveness of living in rural areas. India actually instituted a policy licensing no new industrial activities in its five large urban centers. Unfortunately, these policies have too met with only limited success as decentralization does very little to create new jobs. Other countries offer tax breaks and other such benefits to manufacturers to persuade them to relocate in small cities, but these offerings provide limited incentives. A big advantage of large cities to small cities is that large cities provide the suitable infrastructure that smaller cities are unable to offer large industry (Oberai, 72).

A generation ago, the economist Simon Kuznets proposed that income inequality generally rises as development proceeds, falling only after the rewards of growth accumulate (David Wheeler et al., 8). Income inequality has not yet begun to fall in cities of the developing world. Poverty and unemployment are clear effects of rapid urbanization in Third World countries. Although policies can be implemented to temporarily slow urban growth, and hence lower unemployment rates and poverty levels, ultimately these policies have tended to be ineffective in the long run. Third World governments must carefully weigh the costs and benefits of urbanization and decide upon more effective policies to find a proper medium between economic development and maintaining higher standards of living for all inhabitants of developing cities.

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