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close this bookBasic Facts on Urbanization (HABITAT, 2001, 21 p.)
View the documentAbout
View the documentIntroduction
View the documentGeneral Demographic Trends
View the documentThe Growth of Large Cities
View the documentThe Economics of Cities
View the documentUrbanization and Feminization of Poverty
View the documentThe Challenge of Adequate Housing
View the documentHomelessness
View the documentUrban Violence
View the documentEnvironmental Deterioration
View the documentAccess to Services and Basic Infrastructure
View the documentChildren in the Urban World
View the documentSustainable Urban Development
View the documentGlobal Campaigns on Security of Tenure and Urban Governance
View the documentNotes
View the documentList of References

The Economics of Cities

Until the 1980s, mainstream development theories suggested policies to discourage rural-urban migration. In terms of poverty reduction strategies, these theories were based on the assumption that "attempts to tackle urban poverty directly - by creating jobs and providing public services unavailable in rural areas - simply attracts more of the rural poor, and their migration wipes out any gains."(7) Yet, it has since been realized that this is not an argument against addressing the problem of urban poverty directly. People are not becoming poor because they move from rural to urban areas. In most cases they simply remain poor, despite moving.(8)

Cities are large markets in which economies of scale can be exploited. This leads to an increased division of labour. Furthermore, cities are at the heart of technological and social change and they absorb labour supplies as a consequence of rapid economic growth. Urban and rural development are mutually supportive. Rural areas supply cash crops to urban areas; they purchase inputs from the cities; and they add inter-sector flows of savings for urban capital development. Meanwhile urban areas supply necessary manufactured goods for farming and urban expenditures add to rural growth.(8)

In some countries changes in the urban economy have been dramatic since the early 1980s. Industrial countries have witnessed a recomposition of activities, with increased employment in service industries and reduced employment in manufacturing. This has led to a re-allocation of industrial capacity among city-regions in a process of continuous structural-spatial adjustment. Change is also occurring in the countries transforming from socialism to capitalism, led by price liberalization and the privatization of capital. This alters patterns of income distribution and results in an increased income stratification of residential areas. It also leads to new geographical patterns of trade and investment, consequently affecting the relative growth (and regress) of some city-regions.(8)

During the last two decades, unemployment has risen consistently, in some industrial countries up to 20 per cent.(9) The situation in many developing countries is even worse. Figures for open unemployment do not reflect the real scale of the problem. A large part of the workforce in developing countries is underemployed, i.e. people are working short hours, are not properly utilizing their skills, or have inadequate productivity.(10)

More than 50 per cent of the workforce in urban areas of Sub-Saharan Africa(11) are currently employed in the informal sector (see table 5). Studies of informal-sector economic activities reveal that between 50 and 75 per cent of all dwellings in low-income settlements double as places of work.(12) A wide range of such home-based enterprises can be found in most low-income neighbourhoods in all developing countries. The activities range from the renting out of rooms for dwelling purposes or as storage spaces, to retailing, workshops, laundry services, tailoring, knitting, livestock rearing, doctors and dentists, etc.(10)

Table 5. Employment in urban informal sector, by region (1993)


As percentage of urban employed population

Industrial countries


High-income economies


Transitional economies


Developing countries


Latin America & Caribbean


Sub-Saharan Africa


North Africa & Middle East


Asia & Pacific


World total


Note: Based on data from selected cities (see note 11).
Source: Based on UNCHS (Habitat), 1998.