Home .Society Urbanization and labor markets in Asia
Urbanization and labor markets in Asia
Wednesday, 15 June 2011 08:52

Perhaps one of the most dramatic aspects of East Asia’s rapid economic development is the exponential growth of its cities.  This has many implications – for workers who migrate from the country to the city, for construction of housing and other infrastructure in cities, for the provision of social services, and for the management of urban environments.


Successful management of this rural-urban migration is key to achieving sustainable and inclusive economic development.  Let’s first take a look at some theory, then the evidence.

(i)               First, some theory

-- “Great unbundlings”


How does urbanization get started?  Professor Richard Baldwin’s theory of the “great unbundlings” provides some insights.  Until mid-18th century, with exception of a few cities, every region in every nation was quite similar, namely poor and agrarian.  Trade costs were prohibitive, both within and between nations.  Thus, each village’s consumption was “bundled” with its production, with very little leakage outside the village.


And then came the first unbundling.  Rapidly falling transportation costs (thanks to steamships, railways and the telegraph) enabled geographical separation (“unbundling”) of production and consumption.  Goods could then be produced in the most efficient place (a factory), then transported to consumers.  This meant that there was much greater trade both within countries, and between countries.


These factories could now achieve economies of scale and economies of agglomeration.  Innovation could take place thanks to mutual learning from the clustering of people together.  Each factory undertook all phases of production -- product design, component manufacture, assembly and marketing.  This first unbundling initially took place in Western Europe and the US in 19th century.  A second phase then began in East Asia in the 1950s, starting with the rise of Japan, then the Newly Industrialising Economies (NIEs) of Hong Kong, Korea, Singapore and Taiwan, and then ASEAN, China, etc.


Massive migration from the countryside to urban centers was a characteristic of this first unbundling.  In the first phase, there was also large scale migration from the Old World to New World.

-- Lewis Model -- migration from non-capitalist subsistence sector to capitalist sector


Nobel-prize winning economist, Sir Arthur Lewis, provided some simple but powerful insights in his seminal 1954 article entitled “Economic Development with Unlimited Supplies of Labor”.  Lewis argued that developing countries have a dualistic structure, with a capitalist sector and a non-capitalist ‘subsistence’ sector.  The capitalist sector attracts the migration of workers from the subsistence sector, which is characterized by surplus labor and which earns more wages in the capitalist sector than in the subsistence sector.


Even though the capitalist sector might develop quickly, wages do not increase because of the unlimited surplus of labor.  This means that capitalists make high profits.  But this helps fuel growth, as the profits are invested.  In the initial stages of this process, output does not decline in the subsistence sector, because the marginal productivity of labor is negligible.


Eventually, the reservoir of surplus labor in the subsistence sector is exhausted, and wages in the subsistence sector begin to rise – the so-called Lewis turning point.  This also pushes wages in the capitalist sector upwards and reduces profit levels.  The process of capital accumulation slows down.  At this point, we no longer have a dualistic economy.  The capitalist and subsistence labor markets are now integrated.  This Lewis turning point can be postponed by capitalists by two means -- encouraging inward migration from other countries with surplus labor or exporting capital to countries where there is still surplus labor.


Lewis was clear in his response to critics that he was analyzing migration from the traditional sector to the modern sector, which is not necessarily the same as from agricultural to industrial or rural to urban.  Industry and cities can have “traditional” elements.


But in fact, Lewis’s model is most interesting for analyzing urbanization and industrialization in developing Asian countries like China and India.  Michael Todaro has developed a refined version of the Lewis model based on expected rather than actual wages differentials between the country and the city.

-- Urbanization and the "facilitating state"


As World Bank Chief Economist, Justin Yifu Lin, has argued in the “new structural economics”, the role of government is to facilitate market-based development through the provision of infrastructure.  Fundamentally, economic development is a dynamic process along a wide spectrum from a low-income, subsistence agrarian economy to a high-income, industrialized, urban economy.   And infrastructure is most critical of all in the urbanization process.


Effective market development in our cities requires both hard infrastructure like highways, port facilities, airports, telecommunications systems, electricity grids and other public utilities, and soft infrastructure such as institutions, regulations, social capital, value systems, etc.  Countries at different stages of development have different economic structures, and have different infrastructure requirements.  When a country reaches the global technology and industrial frontier, it needs infrastructure to promote innovation and creativity.

(ii) Now, the evidence

-- never forget Asia’s high rates of “near-poverty”!


In the past few decades, developing Asia has seen a dramatic fall in the share of people living in absolute poverty, defined by the World Bank as below $1.25 a day.  East Asia and the Pacific the proportion of the population living under $1.25 a day has fallen from 79% in 1981 to 18% in 2005 (for China the fall is from 84% to 16%).  At the same time, the share of people living below $2.50 a day has fallen from 95% in 1981 to 52% in 2005 (for China the fall is from 99% to 50%).


In other words, half of developing Asia’s population, some 1 billion people, is still quite poor.  And although poverty would have fallen further since 2005, the global financial crisis has tempered that effect, and the dramatic rise in food and energy prices has also offset much of that fall.  One important factor is the rising income inequality in Asia, as the rich are benefiting from development much more than the poor.

-- developing Asia is urbanizing at a very high rate.


Globally, there has been an important rise in urbanization – from 29% in 1950 to 37% in 1975 and to 50% in 2009, according to the United Nations.  Urbanization is expected to continue, with urban populations rising to 57% in 2025 and further to 69% in 2050.  As we would expect, the level of urbanization is much higher in the developed world – where it was already 53% in 1950, and then grew to 67% in 1975 and 75% in 2009.  Continued modest growth in urbanization is expected looking ahead – to 79% in 2025 and 86% in 2050.


However, the secular trend in urbanization is much more dramatic in the developing world.  It rose from 18% in 1950 to 27% in 1975 and 45% in 2009.  While its rate of urbanization will not yet catch up with the developed world, it is expected to rise to 52% in 2025 and 66% in 2050.  The overall figures for Asia are similar to that of the developing world as a whole – 16% in 1950 to 24% in 1975 and 42% in 2009.  It could then rise to 50% in 2025 and 65% in 2050.


Asia is home to the world’s highest number of urban agglomerations.  In 2009, the top 10 were Tokyo (37 million), Delhi (22 million), Sao Paulo (20 million), Mumbai (20 million), Mexico City (19 million), New York (19 million), Shanghai (16 million), Kolkata (15 million), Dhaka (14 million) and Buenos Aires (13 million).  Other high ranking Asian cities are: Karachi at 11th (13 million), Beijing at 13th (12 million), Manila at 15th (11 million), Osaka-Kobe at 16th (11 million).


Looking ahead to 2025, Tokyo is expected to still have a population of 37 million.  But cities in developing Asia will see sharp increases in their population – Delhi (29 million), Mumbai (26 million), Dhaka (21 million), Kolkata (20 million), Shanghai (20 million), Karachi (19 million), Beijing (15 million), and Manila (15 million).


For Asia, figures on the growth in national urban populations from 2009 to 2050 are also of great interest – Bangladesh – 28% to 56%; Cambodia – 20% to 44%; China – 46% to 73%; North Korea – 60% to 75%; India – 30% to 54%; Indonesia – 44% to 66%; Japan – 67% 80%; Laos – 32% to 68%; Malaysia – 71% 88%; Myanmar 33% to 63%; Nepal – 18% to 48%; Pakistan – 36% to 59%; Philippines – 49% to 69%; South Korea – 83% to 91%; Thailand – 34% to 60%; and Viet Nam 30% to 59%.


In short, continued urbanization is a big part of the Asian and global development game looking ahead.  At the same time, it is estimated that one-third of all urban residents are poor, and urban poverty is declining more slowly than rural poverty.

-- employment is shifting out of agriculture and into manufacturing and services


From 1990 to 2009, there have been some dramatic declines in employment in the agriculture sector – China from 60% to 38%, Korea from 18% to 7%, Sri Lanka from 47% to 34%, Indonesia from 56% to 41%, Malaysia from 26% to 14%, Philippines from 45% to 32%, Thailand from 63% to 39%, and Viet Nam from 72% to 52%.


The ADB’s data on manufacturing is only sketchy, but for services shows sharp rises from 1990 to 2007 – Hong Kong from 62% to 86%, Korea from 47% to 67%, Taiwan from 41% to 58%, Sri Lanka from 34% to 42%, Indonesia from 30% to 40%, Malaysia from 47% to 57%, Philippines from 40% to 49%, Singapore from 62% to 76% and Thailand from 23% to 37%.

-- Unemployment rates are low, but informal employment is high, social safety nets weak, especially in poorer countries


By international standards, unemployment rates in developing Asia are low (all figures 2009 or most recent) – China 4.3%, Korea 3.6%, Sri Lanka 5.6%, Indonesia 8.1%, Malaysia 3.7%, Philippines 7.5%, Singapore 4.1%, Thailand 1.5% and Viet Nam 2.4%.


Nevertheless, young women and men were three times more likely than adults to be unemployed.  Paradoxically, child labor is very high in the region.  Around 114 million (44 million in South Asia) children aged between 5 and 17 years are engaged in child labor, many of them in hazardous situations or conditions, such as working in mines, working with chemicals and pesticides in agriculture or working with dangerous machinery. They are everywhere but invisible, toiling as domestic servants in homes, laboring behind the walls of workshops, hidden from view in plantations.


One reason why unemployment is very low in Asia is that public spending on social protection is also very low.  Many people simply have to work to survive.  Public spending on social protection in Asia and the Pacific amounts to 5.3% of GDP -- the lowest of any continent, and equal to sub-Saharan Africa.  This compares with 25.1% for Western Europe, 18.9% for Central and Eastern Europe, 16.0% for North America, 13.6% for North Africa, 13.5% for the CIS, 10.2% for Latin America and 9.8% for the Arab States.


But in 2009 “informal employment” accounted for over 60% of total employment.  South Asia has the highest share of informal employment, at 77% in 2006, ahead of South East Asia and the Pacific at 62% and East Asia at 51%.  While informality means more flexibility for employers, for employees it usually means no contract, no security, no training, no social benefits and no recourse in the event of a failure to be paid.  Women, youth and older people are disproportionately represented in the informal economy, as are many indigenous and tribal people, workers with disabilities and those affected by HIV/AIDS.

-- Many reports of human rights’ abuses to Asian workers


The reports of the NGO China Labor Watch (CLW) are quite simply horror stories.  One incident that received great publicity last year was the 13 young workers who attempted or committed suicide, mostly by jumping off their dormitory, at the two Foxconn production facilities in southern China between January and May 2010.  Foxconn is a Taiwanese company that assembles consumer electronics for a number of well-known multinational companies like Apple, Intel, Cisco, Hewlett-Packard, Dell, Nintendo, Nokia, Microsoft, Sony, and Samsung.  So when you think of iPhones, iPods and iPads, think Foxconn.  The company's largest operation is at the Longhua Science & Technology Park, a cramped, walled campus sometimes referred to as "Foxconn City" or "iPod City".


Why did these suicides occur?  It is argued that management has used abusive and illegal methods to raise worker efficiency, generating widespread grievances and resistance at the workplace level.  Competitive pressure from leading international brands have resulted in substandard conditions in their global electronics supply chains.  And local Chinese officials in collusion with enterprise management, systematically neglect workers’ rights, resulting in widespread misery and deepened social inequalities.

-- Trade union rights are very compromised


According to the International Trade Union Confederation, many workers who are trying to claim basic rights to decent work and a decent life through trade union activities are being met with sackings, violence and in extreme cases murder by governments and by employers and businesses.  The Americas was the deadliest region last year, but Asia has not been spared violence.  Killings were recorded in Bangladesh, Pakistan, and the Philippines.  In Burma, Cambodia, Nepal and the Philippines, many trade union organizations operate in a climate of violence and constant threats.  Cases of intimidation were also reported in Bangldesh, Korea, Cambodia, India, and the Philippines.  Single, government-controlled or government-sponsored trade union systems remain in China, Laos, North Korea and Vietnam.

-- Role of export processing zones


Export processing zones have proliferated in Asia as a tool to boost industrialization by providing incentives like enhanced physical infrastructure, streamlined administrative services, fiscal incentives, and export promotion services.  They also have relaxed legal and regulatory requirements, including with respect to workers and the environment -- like legal restrictions on trade union rights, and the lack of enforcement of labor legislation.


As the OECD says, “exemptions or relaxation of labor rules and other regulations (in EPZs) have often been detrimental by creating differential standards within a country which may disadvantage certain classes of workers …:.”  The ILO’s World Commission on the Social Dimension of Globalization spoke even more strongly in arguing that “stronger action is required to ensure respect for core labor standards in EPZs and, more generally, in global production systems”.  Core labor standards are: freedom of association and the effective recognition of the right to collective bargaining; elimination of all forms of forced or compulsory labor; effective abolition of child labor; and the elimination of discrimination in respect of employment and occupation.

-- China and inclusive growth


According to President HU Jintao, the Chinese government is a strong supporter of inclusive growth.  But is it really true?


“China is a strong supporter and follower of inclusive growth, a concept that is consistent with our pursuit of scientific development and social harmony …The ultimate purpose of inclusive growth is to spread the benefits of economic globalization and economic development among all countries, regions and people and to realize balanced economic and social progress through sustainable development …We should pursue social equity and justice…


To this end, we must ensure everyone equal access to development opportunities, steadily put in place a system for guaranteeing social equity with a focus on ensuring fairness in rights, opportunities, rules and distribution, and eradicate obstacles that keep our people from participating in economic development or sharing the fruits of economic development. We should put people first, ensure and improve people's livelihood, institute a social safety net that covers all, and address issues vital to people's livelihood, including education, labor and employment, health care, old-age support and housing. We should work hard to ensure that development is for the people and by the people and its fruits are shared among the people.”

But what about the quality of city life?


There are many good reasons for people to leave the country for city life – job opportunities, availability of services, and an escape from constraining social and cultural traditions in rural villages.  Cities themselves can generate economies of scale and agglomeration, be home to industrial clusters, and thus lead to economic efficiencies.  They can also become hubs of creativity, innovation, technology development and higher education.  Most GDP is generated in cities, though they also account for the bulk of energy consumption and carbon emissions.


Most regrettably, however, in developing Asia, cities are characterized by poverty, slums, congestion, crime and violence.  Many cities have unreliable power supplies, intermittent water availability, insufficient treatment of wastewater before it is discharged into local waterways, flooding due to poor drainage and uncollected garbage.  The combination of rapidly growing cities, growing slum populations, disputed land tenure, corrupt officials and high unemployment levels can lead to an explosive situation, as evidenced in Latin America.


The World Bank has estimated that globally one-third of all urban residents are poor, representing one-quarter of the world’s total poor people.  Poverty is increasingly becoming an urban phenomenon.  The pace of urban poverty reduction is slower than rural poverty reduction.  The incidence of urban poverty is greatest in South Asia and Sub-Saharan Africa, and is noticeably lower in East Asia.  Poor services and squalor are too common in Asian urban areas, with more than half of the world’s slum population living in Asia.  And this number is increasing despite the region’s rapid economic growth.


So the image that one might glean from the Lewis model, that is, leaving a traditional, subsistence life for a modern, capitalist life, does not always correspond to reality.  Government, and in particular the facilitating state, has an important role to play in terms of providing infrastructure for safe, sustainable cities, and in particular, employment, secure living conditions, infrastructure and services, natural disaster preparedness, transport, etc.  .

Urbanization and climate change




In addition to the quality of city life, we also need to worry about future climate change.  This will have a big impact on Asian urban populations, and pose great challenges.  Measured by future populations that will be exposed to half metre sea-level rises, 15 of the world's 20 most exposed cities are in Asia.  The list of 20 is: Kolkata; Mumbai; Dhaka; Guangzhou; Ho Chi Minh City; Shanghai; Bangkok; Rangoon; Miami (US); Hai Phong; Alexandria (Egypt); Tianjin; Khulna; Ningbo; Lagos (Nigeria); Abidjan (Cote d'Ivoire); New York (US); Chittagong; Tokyo; and Jakarta.


Has China reached the “Lewis Turning Point”?



Lewis argued that as the modern sector of a low income country continued to expand, surplus rural labor would eventually disappear.  The consequence would be rising wages, a shift of investment to other low income countries with surplus rural labor, and perhaps inward migration.


It is of course difficult to identify with any great precision the Lewis turning point.  But some analysts point to labor shortages and rising wages since 2003 as evidence that China has reached the Lewis turning point.  Further, it seems that Viet Nam has been attracting investment that might otherwise have gone to China.  Against that, it can be argued that more than half of China’s population is still rural, and that there are still large real income gaps between rural and urban China.


The arrival of the Lewis turning point would be a positive development in terms of improving income distribution.  But it is also inflationary.  Fundamentally, it signals the moment where industrial upgrading is necessary, that is, it needs to graduate from low-cost labor-intensive production.  In other words, it is the moment where it is necessary to become an “innovation economy”, otherwise there is the risk of falling into a “middle income trap”.

Urbanization and the destruction of tradition


In his book, Globalization and its Enemies, Daniel Cohen tells the following sad tale of contact with the outside world of an Algerian village.  The French dispersed DDT in the ponds to combat malaria and typhoid and built a road to end the village's isolation.  The eradication of malaria and typhoid triggered a demographic explosion, doubling the population in a generation.  Shepherds had to enlarge their herds which rapidly destroyed the soil!  Thanks to the road, some exported their surplus livestock.  Some became rich, others fell into debt, and some were ruined.  The inequality became apparent.  The richest members of this society sent their children to the school in the nearest large town.  The Koranic tradition was quickly devalued.  The traditional society was disintegrated by this slight contact with Western civilization.  Today, as yesterday, a considerable number of poor countries are destroyed by the fact that they are not protected against the perverse effects of industrial society and of urbanization, or against the lifestyle they entail.

Which are the best cities?


There are several organizations which provide rankings of the world's most livable cities.  Mercer's top 5 livable cities are: Vienna, Zurich, Geneva, Auckland and Vancouver.  The Economist's top 5 are Vancouver, Melbourne, Vienna, Toronoto and Calgary, while Monocle magazine has as its top 5: Munich, Copenhagen, Zurich, Tokyo and Helsinki.


What is notworthy is that all of these cities are of a small to medium size, except for Tokyo.  And while they are all certainly pleasant and agreeable, none of them (again except for Tokyo) are really exciting like New York, London, Paris, Hong Kong or Shanghai.


For a city to be exciting and dynamic, it must have a hard edge to it.  This feeling is captured in the great song, "Summer in the City", a 1966 hit song from Lovin’ Spoonful, which has also been recorded by Joe Cocker.


Read this extract from the lyrics:


“Hot town, summer in the city, Back of my neck getting dirty and gritty, Been down, isn't it a pity, Doesn't seem to be a shadow in the city, All around, people looking half dead, Walking on the sidewalk, hotter than a match head.


But at night it's a different world, Go out and find a girl, Come-on come-on and dance all night, Despite the heat it'll be alright, And babe, don't you know it's a pity, That the days can't be like the nights, In the summer, in the city."



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Chen, Shaohua and Martin Ravaillion, The developing world is poorer than we thought, but no less successful in the fight against poverty, World Bank


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Lovin’ Spoonful. Summer in the City












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