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Trade Liberalization and Informal Labor Markets  

Lourenço S. Paz and Jennifer P. Poole

In recent decades, economic reforms and technological advances have profoundly altered the way employers do business—for instance, the nature of employment relationships, the skills firms demand, and the goods and services they produce and export. In many developing economies, these changes took place concurrently with a substantive rise in work outside of the formal economy. According to International Labour Organization estimates, informal employment can be as high as 88% of total employment in India, almost 50% in Brazil, and around 35% of employment in South Africa. Such informal employment is typically associated with lower wages, lower productivity, poorer working conditions, weaker employment protections, and fewer job benefits and amenities, and these informal workers are often poorer and more vulnerable than their counterparts in the formalized economy. Informal jobs are a consequence of labor market policies—like severance payments or social security contributions—that make the noncompliant informal job cheaper for the employer than a compliant formal job. Each model has a different benefit (or lack of punishment) for employing formal workers, and a distinct mechanism through which international trade shocks alter the benefit-cost of these types of jobs, which in turn results in a change in the informality share. The empirical literature concerning international trade and formality largely points to an unambiguous increase in informal employment in the aftermath of increased import competition. Interestingly, increased access to foreign markets, via liberalization of major trading partners, offers strongly positive implications for formal employment opportunities, decreasing informality. Such effects are moderated by the de facto enforcement of labor regulations. Expansions toward the formal economy and away from informal wage employment in the aftermath of increased access to foreign markets are smaller in strictly enforced areas of the country.

Article

Urbanization and Emerging Cities: Infrastructure and Housing  

Gilles Duranton and Anthony J. Venables

Urbanization is a central challenge of our times. At its core, it is an urban development challenge that requires addressing transportation and housing in cities. Transport improvements can reduce travel times and improve the spatial reach of urban dwellers. But these improvements may be crowded out by latent demand for travel and may lead to worse congestion, pollution, and other negative externalities associated with urban traffic. To evaluate the effects of transport improvements, direct travel effects must be measured. Then, an improvement in traffic conditions somewhere may spill over to other areas. Firms and residents may also relocate, so economic growth close to a transport improvement may just result from a displacement of economic activity from other areas. Conversely, better accessibility is expected to foster agglomeration effects and increase productivity. Valuing these changes is difficult, as it requires being able to quantify many externalities such as congestion delays, scheduling gains, and greater job accessibility. Housing policies present different challenges. More fundamental policies seek to enable housing construction by offering more secure property rights, up-to-date land registries, and competent land-use planning—all complex endeavors and all necessary. Other housing policies rely on heavy government interventions to provide housing directly to large segments of the urban population. These policies often flop because governments fail to link housing provision with job accessibility and appropriate land-use planning. Housing is also an expensive asset that requires significant initial funding, while credit constraints abound in the urbanizing world. Policymakers also need to choose between small improvements to extremely low-quality informal housing, retrofitting modern housing in already-built urban areas, or urban expansion. All these options involve sharp trade-offs, subtle induced effects, and complex interactions with transport. All these effects are difficult to measure and challenging to value.