Urbanization and (In)Formalization

Two of the great stylized predictions of
development theory, and two of the great expectations of
policy makers as indicators of progress in development, are
inexorable urbanization and inexorable formalization.
Urbanization is indeed happening, beyond the "tipping
point" where half the world's population is now
urban. However, formalization has slowed down significantly
in the past quarter century. Indeed, informality has been
increasing. This disconnect raises a number of questions for
development analysis and development policy. Is the link
between urbanization and formalization more complex than
what had been thought? What does this mean for policy? The
first core section of this paper asks what exactly is meant
by formality and informality. The second core section turns
to processes of urbanization and asks how these processes
intersect with and interact with the incentives to
formalize. The paper examines why cities attract the
informal sector and the role that urbanization plays in
growth and job creation through both the formal and informal
sectors. Cities generate agglomeration benefits in the
informal sector, perhaps more so than for the formal sector.
The third core section is devoted to policy. At the current
conjuncture, agglomeration benefits make a strong case for
urbanization as an integral part of development strategy,
but concerns about jobless growth and about urban poverty
require a focus on the informal sector.