‘Migration into cities has resulted in the rise of the informal sector rather than transforming the urban space into an industrial site.’
Discuss the reasons for this seemingly perverse phenomenon using examples from any two countries.

Starting from the late 18th century, the Industrial Revolution led to an incontestable migration from the countryside to the city as industries agglomerated in the centre of Western cities. A century later, as industrialization gained what is known as the developing world, classical economists such as Lewis predicted large waves of migration that would transform the urban space into an industrial site. Yet, the most noticeable phenomenon of migration was a rise and establishment of an informal sector, comprising up to 90% of jobs and 70% of GDP production in countries like India. Are these results perverse, i.e. contrary to the accepted or expected norm? Looking specifically at cities in Ghana and Pakistan, while economic policies must take some blame for the lack of industrialisation, the rise and perseverance of an informal sector results of the confrontational and antagonising policies taken against rural to urban migration, which itself was misunderstood by authorities. More recent research proves that while the informal sector remains as prominent, it is not incompatible with the development of industry.

The traditional explanation of migration towards cities (rural-urban migration) is laid out by Lewis in a model that emphasises how the economy goes through structural change. The Lewis model assumes a dualistic economy, where a productive industrial/manufacturing sector sets wages WM at the marginal product of labour contrasts with an unproductive agricultural sector that follows an average product rule. Following classical economics, the industrial production process involves the input of capital such as machines to enhance labour productivity from TPM1 to TPM2 as the level of capital increases from KM1 to KM2. Industries primarily locate in urban areas to be closer to transport networks and input or output markets, as well as to access a larger pool of labour1. The agricultural wage is set the average product of labour where marginal production is nil (WA). Thus, wages are higher in industrial urban areas, and the wage gap pulls the labor force towards cities until an equilibrium wage is reached
Weq = WA = WM, at which point the migration stops.
The unproductive agricultural sector implies that it contains a significant labour surplus, which in turn allows Lewis to assume that industrialists face a perfectly elastic supply curve SL. Accordingly, firm managers can increase profits by reinvesting their surplus (WMFD1) into more capital, producing at point G and earning (WMGD1). With time, the urban space industrialises and more jobs are created (moving from L1 to L3 onwards).
The model also predicted that developing countries like Ghana and Pakistan would have a flourishing urban industry, thanks to their large agricultural labour surplus, and post-war investment attracted by the relatively more developed infrastructure left by their imperial power as compared to other colonies. However, over the past century, the economy of both countries, just as of most developing countries, has been characterised by the rise of an informal sector.

Development economists initially considered this as a perverse phenomenon. The first explanation could have been the halt or drop in growth rate that took place in countries like Ghana and Pakistan from the late 1960s. In fact, former colonies aimed for self-sufficiency to secure the independence gained in the years following 1945, and developed what is known as Import Substitution Industrialization. Ghana and Pakistan, who were among the first colonies to gain independence in their respective region, heavily invested in the production of goods for which they were at a competitive disadvantage such as steel or wheat, and these industries collapsed as international trade gained prominence. Moreover, even where industrialisation took place, Lewis’ assumption that industrialists duplicate their production process did not always hold: they also invested in production processes that required less labour, effectively increasing the slope of the labour demand curves (D1/2/3) and causing a reduced labour demand.3 Hart underlines that the problem is not always a shortage of formal sector jobs, but rather a collapse of the real wage that they offer, mainly due to a rise in living costs. In this way, the Ghanaian worker overburdened by food prices in 1960s, on top of rent, preferred to move into the informal sector (Hart, 1973).

Following the Lewis’ model, and assuming costless travel to and from the city, migrants without jobs would immediately return home. However, in practice, these costs oblige migrant workers to work informally for survival (Fields, 2004). In this job-scarcity scenario, education becomes key: only the most skilled are employed in urban areas of Pakistan. The migrants that remain jobless are the least skilled, resulting in an informal sector that is less productive and capital-less, or in other words, not industrial. Subsequently, the marginalization of a certain part of society causes the development of an entire informal economy: those working informally still seek an access to credit, a protection of their property, a transport system, etc. which itself must necessarily be informal (De Soto, 1989). Moneylenders, unregistered bus/taxi drivers, and gang leaders gain prominence in this way (Hart, 1973).

The Harris-Todaro model revises Lewis’ work to explain the persistent growth of the informal sector. They factor in migrants’ perceptions of the probability of getting a formal job (le) as a proportion of formal jobs available (lUS). Thus, Weq = WA = WM . le/lUS
Following their model, people continue moving to the city despite the wage adjustment mechanism, i.e. despite the fact that WM = WA. The difference between le and lUS is due to the imperfect information received by the rural population. It is more likely to hear from successful migrants who made enough money to return home, or who are proud enough to recount their success, which causes people to overestimate the number of jobs available (Hart, 1973) . On top of this biased information, the information itself takes time to travel, sometimes up to several years.
Furthermore, the information asymmetry existing between workers accentuates the problem, since some are advantaged in obtaining a job thanks to the information they have received from peers: in brief, migrants do not all face the same probability of getting a job in the first place, but as they are unaware of this information asymmetry, everyone still migrates. For example, Pakistan: those not part of extended family less likely to get job (Alderman & Kozel, 1989). Another effect of this information asymmetry is that migrants primarily aim for jobs already occupied by their kin (Renooy, 1990). Thus, if their kin is already part of the informal economy, or is not part of the industrial sector, migration will take place without industrialisation and/or sustain the informal economy. Peil (1972) explains the quasi-inexistence of industrial jobs among Frafras as due to the fact that Frafras predominantly seek the same employment as their kin. “Thus, a significant constraint limiting access to urban employment of all kinds is the actor's perception of the competitive advantage or disadvantage to himself of ethnic or kin-group membership” (Hart, 1973).

Nonetheless, the persistence of the informal sector seems to be even more rooted in the flawed conceptualisation of the informal sector. This has resulted in policies that are confrontational and unadapted to the everyday reality of most workers, such as their migration patterns.
Firstly, a number of developing countries inherited an established legal system from their colonial power, which was usually copied directly from the power’s domestic law (Todaro, 2009). Yet, one could argue that the law was adapted to the economic conditions in that country, and was both too complex and unadapted to the conditions in developing countries. In fact, English local authorities did not start formalizing land tenures and employment until the second half of the 19th century, after several decades of industrialisation. Looking at Pakistan, the administrative burden of formalizing an employment was already too complex to even be understood by the average worker in 1970, was associated with serious costs and could take up to several months if not years. These causes of informality (namely, higher taxes, price controls) are comparable to the factors that encouraged the development of a black market during World War II (Feige, 1989), proving that a rise of the informal sector is not necessarily a perverse phenomenon, given the administrative and economic context.
Likewise, in the 1970s, it was difficult to formalize a seasonal employment in Ghana, or to register more than one profession per person because the law made few, if any, provisions for such an occupation. Considering that many of the workers in Accra travelled seasonally to sell their rural produce in the city, and that migrants have always been accustomed to have more than one income-source to diversify the risk of crop-failure, the Ghanaian law condemns an entire lifestyle to informality (Hart, 1973).

Secondly, by considering the informal sector as a burden, and a parasite, governments have promoted policies that reject the informal sector, exclude it from the city, and most of all, prevent it from becoming formal. In fact, the informal sector is primarily defined, at least historically, by its illegality: it is not recognised by the state because the state does not have the capacity to regulate or tax the activity. Planners have accordingly disregarded its interests, since those who are informally employed are considered as free-riding public services (tapping into water pipes, diverting electric cables). As for its contribution to the economy, the informal sector is also commonly regarded as ‘the low-productivity urban sector', 'the reserve army of underemployed and unemployed', 'the urban traditional sector' (Hart, 1973). In addition, it is associated with dwellings of temporary and hazardous nature, as it does not have to comply with any regulations. Consequently, the state offers no title to land, no security of tenure and hence no incentive to industrialise by investing capital into one’s land as laid out by De Soto in his Mystery of Capital (1999): in Accra, inhabitants had to wait until 1986 for Parliament to address the issue of land titling in slums through the Land Title Registration Act. These adverse policies are reinforced by what Lipton (1977) calls an “urban bias”, under which interest groups with a significant weight on urban decision-makers use their power to protect their benefits and exclude others from sharing them.
Thus, the negative perception of the informal sector is reflected in laws and policies that prevent a segment of the population from playing a role in the formal capital-intensive economy (De Soto, 1989).

Still, why does the informal sector continue to grow? Arguably, its widespread and continuous expansion is simply due to the fact that it is a viable sector, sometimes even more viable and efficient than the formal sector, and in any case, more accessible to the average worker (De Soto, 1989). Once the conceptualisation and definition of the informal sector changes to ‘a sector that is not regulated by the state’ (Gerxhani, 1999), its advantages become very clear, especially to (neo)classical economists. As mentioned earlier, the costs of licenses, permits, taxes, and price controls in the course of business is often unprofitable in the context of international competiton. In India, the major part of waste collection and recycling is done informally, to such an extent that in preparation for the 2010 Commonwealth Games, Delhi’s municipality preferred to subsidise the informal waste collecting system rather than extend its public waste collection. Furthermore, most informal economies are now heterogeneous and complete. As mentioned earlier, many complementary services like informal credit institutions, transport systems, and public services develop to complement the production side of the informal sector as much in Lahore than in Accra. Such informal arrangements present efficiency gains: the moneylender knows his clientele and can charge lower rates due to the better appreciation of the risk involved.
In many ways, the informal sector itself could be considered as industrial. The International Labor Rights Forum states that “large Pakistani manufacturers contract their work out to middlemen, who get it done, often under a piecemeal arrangement, by these informal labourers”, proving the key role of the informal sector in urban industry. Similarly, Gunilla (1981) also describes the existence of a productive informal industry in Ghanian midsized cities (possibly due to the looser government control than exerted over Accra), which focuses on more specialized products than the resource-input intensive and mass-production formal industry.

Thus, the significant rise in informal employment that resulted of rural to urban migration is not necessarily perverse, especially once considering the context in which it happened. Improvements of the Lewis model show that the informal sector is a normal result of rapid urbanisation. Moreover, an examination of municipal laws and policies suggest that informality was strongly reinforced by the confrontational approach taken by the governments of developing countries Hence, the waves of migration to cities could possibly have led to greater industrialisation had they been tackled with the correct policies, but migration and the informal sector themselves have not hindered industrialisation – in fact, quite the reverse. Finally, one should also note that while Pakistani and Ghanaian urbanisation presented numerous similarities, the rise of the informal sector can be linked to other factors once examining other countries – Haiti, independent since the early 19th century, failed to industrialise mainly due to a lack of investment and constrained access to capital, and informality results of the loss of records in the midst of endless political upheavals.

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[ 2 ]. Knox P, Urbanisation, Pearson Education, 2009, Chapter 7
[ 3 ]. Centre for Science and Environment, Challenge of the Balance, Delhi, 2010.
[ 4 ]. Todaro, M., Economic Development. Section on Labour Markets and Migration.
[ 5 ]. Pane, George, “Consistent Measures of Import Susbtitution”, National Institute of Economic and Social Research, London 1973.
[ 6 ]. Alderman, Harold & Kozel, Valerie, Formal and informal sector wage determination in urban low income neighborhoods in Pakistan, WB Living standards measurement study (LSMS) working paper ; no. LSM 65; 1989 pp 17, 18, 25.
[ 7 ]. Hart, Keith. 1973 Informal income opportunities and urban employment in Ghana, Journal of Modern African Studies.
[ 8 ]. Margaret Peil, The Ghanaian Factory Worker: industrial man in Africa (Cambridge, 1972)
[ 9 ]. Hernando de Soto (1989) The Other Path: Invisible Revolution in the Third World.
[ 10 ]. Lipton, M., 1977. Why Poor People Stay Poor: A study of urban bias in world development
[ 11 ]. Gerxhani, K., 1999. “Informal Sector in Developed and less Development Countries: A Literature Survey, Tinbergen Institute Discussion Paper. 99-083/2, Tinbergen
[ 12 ]. Tatiana Nenova, Cecile Thioro Niang, Anjum Ahmad, Bringing finance to Pakistan's poor: access to finance for small enterprises, WB Publications, 2007.
[ 13 ]. Gunilla Andræ, Industry in Ghana: production form and spatial structure‬, Nordic Africa Institute, 1981 pp104-107.
[ 14 ]. Hallward, Peter, Damming the Flood: the Politics of Containment in Haiti, 2010, Chapter 1.