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On Migration and Risk in LDCs Author(s): Oded Stark and David Levhari Source: Economic Development and Cultural

Change, Vol. 31, No. 1 (Oct., 1982), pp. 191-196 Published by: The University of Chicago Press Stable URL: http://www.jstor.org/stable/1153650 . Accessed: 01/05/2013 11:52
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On Migrationand Risk in LDCs*

Oded Stark
Bar-Ilan University and Harvard University

David Levhari
Hebrew University of Jerusalem

same periodboth risk and (especially) risk avoidance have assumed in mainstream economics. Yet the major significance expected-income is void of any explicit hypothesis,even in its revisedformulations, decisional riskcontent;2the hypothesis doesnot incorporate a random variable(multiplicative or other),and the impliedutilityfunctionis linear. Confronted withthe evidencethatrural-to-urban often migration resultsnot in high-paying formal-sector but in urban jobs unemploymentor employment remunerated even by by incomethatis meager rural the hypothesis offersthe long-planning-horizon standards, explanation: futureurban are sufficiently expectedearnings high(discountto compensate fora temporary in earnreduction ingnotwithstanding) the short-run in as a source of ings.However, higher variability earnings
* Commentsfrom participantsin a seminarheld at the WorldBank, Washington D.C., are gratefullyacknowledged. 1 MichaelP. Todaro, "A Model of Labor Migrationand UrbanUnemploymentin Less Developed Countries," American Economic Review 59, no. 1 (March 1969): 138-48. 2 MichaelP. Todaro, "UrbanJob and RisingUnemExpansion,InducedMigration

I During the last decade or so, the ruling economic explanation for rural-to-urbanmigration taking place in less developed countries (LDCs) has been the response to the intersectoralexpected incomes differential. Originatinglargely in Todaro's pioneering article, the dominance of the expected-income motive soon became virtually exclusive.1 This is somewhat surprising,especially since duringthe very

"InternalMigration in DevelopingCountries:A Survey," in Populationand Economic Change in Developing Countries, ed. RichardA. Easterlin, National Bureau of Economic Research,Report no. 30 (Chicago:Universityof ChicagoPress, 1980).

ployment," Journal of Development Economics 3, no. 3 (September 1976): 211-25; and

? 1982by The Universityof Chicago. All rightsreserved. 0013-0079/83/3101-0003$01.00

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direct disutility, and the way variabilityin alternative rural earnings and in future urban earnings must figure in migrants' calculations is beyond the grasp of the expected-incomehypothesis. This articleis devoted entirelyto risk as an explanatoryvariableof rural-to-urban migration in LDCs. In making the argument, it may seem that we are overplayingour hand. Clearly, both risk and return count with entities that are making a decision concerning migration, and the focus here on risk is a heuristic device: we wish to draw attention to an overneglected dimension. To the best of our knowledge, the argumentthat aversion to risk is a majorcause of rural-to-urban migrationhas appearedonly in Stark.3 In Section II of this article, that argumentis distilled. In a nutshell, it is suggested that an optimizing, risk-averse small-farmerfamily consituationmanagesto control frontedwith a subjectivelyrisk-increasing the risk throughdiversificationof its incomes portfolio via the placing of its best-suited member in the urban sector, which is independent from agricultural production. The severely limited possibilities for diversificationthat generally characterizehuman capital thus cause no special problemin this case.4 Section III takes up the possibility that the decision-makingunit is the individualand suggests an argument may be adoptedas migration why in such a context, too, rural-to-urban a means of resolving aversion to risk. The suggested policy content of the argumentsis broughtup at the end of each section.
II

Consider a small-farmerfamily with a strong desire to innovate but deterredfromadoptinga new technology because of its subjectivehigh risk content."A necessary conditionfor technologicaltransformation is thus the resolution of familialaversion to risk intersected with a riskincreasingcomponent in the family's incomes portfolio. If insurance marketseither do not prevail or do not form, or they exist but require prohibitivepremiums, the increased-riskrisk-avoidanceconflict must
3 Oded Stark, Economic-Demographic Interactions in Agricultural Development: The Case of Rural-to-Urban Migration (Rome: UN Food and Agriculture Organization,

Development Economics 9, no. 1 (August 1981): 31-41.


4

Journalof 1978);"On the OptimalChoiceof CapitalIntensityin LDCs with Migration," DavidLevhariandYoramWeiss, "The Effect of Risk on the Investmentin Human

ciples and Practices from World Wide Experience, Fifty-eight Yearbook (Chicago: Naants and Dualism With or Without Surplus Labor," Journal of Political Economy 74, no.

5 For some early, excellent, and succinctexpositionsof the deterrent impactof risk aversionon technological at the microlevel,see Horace changein agricultural production Holmes, "Helpingthe Asian Villagerto Help Himself," in Community Education:Prin-

Capital," American Economic Review 64, no. 6 (December 1974): 950-63.

tional Society for the Study of Education, 1959),pt. 1, p. 191;AmartyaK. Sen, "Peas-

5 (October1%6):425-50; John M. Brewster, "Traditional Social Structuresas Barriers Southworthand Bruce F. Johnston(Ithaca, N.Y.: CornellUniversityPress, 1%7),pp. 67-68.
to Change," in Agricultural Development and Economic Growth, ed. Herman M.

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Expected Return D0 2 --------------------------------C

e-----------

-------A

FIG. 1Risk

be resolved internally-that is, through reorganizedutilizationof the family's own resources. That objectively the higherrisk entailed in pursuingthe new technology is rewardedby higherexpected outputis of no avail to the small farmer. It is his subjective risk that counts. If the small farmerwere to be portrayedon a risk/expected-return plane, a necessary conditionfor his moving upward from his present equilibriumposition on a given efficiency frontieris that the risk involved in obtainingthe higher expected return should exactly match his subjective preferences, represented by the frontier. (This, of course, assumes that all variables determiningthe location of the frontier do not change.) Although, as figure 1 shows, the new technology involves an initial objective move fromA to D,6 the smallfarmerconsiders his new (subjective)position to be representedby B, whereas, given e2, what he is willingto bear is a move to C. To avoid B and to locate on C, a simultaneous adoption of a risk-depressingstrategy must accompany the introductionof the new technology. "Spreadingof risks being the great way of diminishingrisk,''1 the small-farmerfamily will attempt to diversify its incomes portfolio. When on-the-farmdiversification-cum-technological-transformation is insufficientor impractical,8 and when ex-farm agricultural or ruraldi6 Once the new technologyis utilized,familiarity with it andexperiencein its application, apartfrom reducingthe subjectiverisk, also ensure a greaterexpected return. Clarendon Press, 1967). 7 John Hicks, Critical Essays in Monetary Theory (Oxford: is providedby the shift from traditionalto of this impracticability 8 An illustration high-yieldingvarieties. Widespreadtraditional risk-reducingpractices are staggered in expectedyields)are plantingwherebydeviationsfromoptimalplantingtime(reduction of the effects of randomly for minimization incurred tradedin particular periodsof water of one crop with another(intercropping), where the various stress, and the interplanting resistance"to stochasticenvironmenin their "environmental crops differsubstantially tal variability-e.g., to drought,local pest damage, and birddamage. However, under the new technology-where a new variety is involved--similar intercropping may be

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versificationoptions either do not exist or are too closely positively correlatedwith stochastic farm production, a portfolio "investment" in urbanearningactivity-namely, migrationof a family member-is the clear strategy to follow. Assumingthat the urban"investment" is distributedindependentlyof all other "investments" and has a mean that is at least as large as that of any other "investment," it is mandatory to enter the urban"investment" in the optimal "investments" portfolioregardlessof the variance of each investment--provided only that it is finite (and nonzero).9 This is an interesting result; rural-to-urban migration is taking expected-incomes difplace in the presence of a positive urban-rural ferential,yet the motive may not be expected-incomemaximizationper se. A strongforce-aversion to risk-which prevailingexplanationsdo not capture, may be churningbelow the surface. That this deeper relation is not easily made explicit using present data should provide an data set; it shouldnot discourage incentive to generatethe appropriate an attemptto uncover a deeper realitythanthat accessible to the naked eye. reThe risk-aversionexpected-income differential-cum-migration lation has a distinct policy implication.Assume that risk avoidance is an underlyingcause of rural-to-urban migration.Assume, further,that an institutional interference aimed at reducing migration is deemed desirable. Under these circumstances, it would be efficient to shift away from exclusive (so far largelyfutile) attemptsto narrowdown the intersectoralwage differentialtoward the creation and/orperfection of ruralinsurancemarkets, even toward a direct provision of technological insuranceto small farmers.
III

Assume, alternatively, that the entity that engages in choice production-is making-to migratetownwardor to pursueagricultural the individual. The individualderives pleasure from income, but the accompanyingrisk (variability)is a source of dissatisfaction. In every period throughout his planning horizon, the individual receives a bundle-expected income and risk-but risk levels (and return) are
useless, even harmful(e.g., when the mixed crops, directlyor indirectly,interactnegatively) or may simply be out of the question (e.g., when considerationsof future use demand the preservationof the purity of the seed). Likewise, extreme sensitivity to deviationsfrom optimalplantingtime effectively eliminatesstaggeredplanting.In addisector of a less developedeconomy, where tion, it is of interestto note thatin an agrarian economic and social variables interact strongly, adoption of the new high-yieldinghence risk-reducing, varieties technologymay impede traditional arrangerisk-sharing, ments.
9 A formal proof is provided in Stark, Economic-Demographic Interactions in Agricultural Development, app. 2 (n. 3 above).

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sectorally dependent. To focus on risk, however, it is convenient for a moment to assume intersectoralequality of expected returns. If the individualwere to pursue agriculturalproduction, he would have to endure some level of risk per periodemanatingfromthe low immunity, especially of traditionalagriculture,to stochastic variabilityin rainfall and weather conditions, plant disease, attacks by pests, and so forth, all affecting both grown and stored crops. This low immunityis especially hazardousas it is usually coupled with absence of institutional insurancearrangements. If the individualmigratesfromthe ruralto the urbansector, he is not subjectedto similarperiod risks. Initial risks on migratingare very high; attempts to enter highpaying sectors may fail. Entry into low-payingsectors, which may be relativelyeasy, entails high probabilityof discontinuityof employment due to high sensitivity (and hence vulnerability)of these sectors to marketfluctuations.And there is, of course, the distinct possibility of involuntary unemployment. But risks (variability) associated with urbanemploymentdiminishwith time and may be relativelylow-that is, lower than the typical risk (variability)associated with agricultural production-after some initial high-riskperiod.10 An individualwho under such circumstancesengages in rural-tourbanmigration obviously attachesa premiumto the early resolutionof (much of) his lifelong income-associated risks. He trades in "medium-level" risks for immediate higher, but thereafter lower, risks. Obviously, his time rate of discount cannot be high and his planninghorizon cannot be short. These are thus especially likely to apply if he is young. He is also one whose degree of risk aversion cannot be small. The underlying reason an individual who is risk averse-and whose time rate of discountis not very high-engages in the said trade of risks is that the disutility from periodic future risks-hence the intensity of the incentive to resolve them-is an increasingfunction of the length of the future envisaged. In consideringmigration,the individual comparestwo levels of expected utility-of-lifetime earnings:(a) the one associated with the ruralincome stream, and (b) the one associated with the urban income stream. We assume that "income" in every period is a bundle of expected income (a source of utility) and variability (a source of disutility). Through the expected utility operator, the two-variablecharacterizationof each bundle is reduced to a single-variable This, in turn, is discounted and characterization.11
10 For evidence on the employmentexperienceof rural-to-urban migrants,see ibid., chap. 3. 11In the case of the 1 - arapproach,this "reducedform"is obtainedthrough a slide southwestwardalong the indifference curve drawn in the expected income-income standarddeviationplane to the intersectionpoint of the curve with the expected-income

axis.

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added to present values of other bundles transformedand then discounted in a similar way. The individualthus faces the easy task of comparingtwo unidimensionalnumbers-"urban utility" and "rural utility." It is clear from the proceduredescribed here that for an individual who is more risk averse, the net utility associated with a given bundle is lower. Otherthings being equal, expected income-variability the sectoralexpected utility-of-lifetime earningslevel will consequently of the be lower. If, through "purchase" some relatively high-riskbunmore distantbundlesturnout to be all in near dles the future, remaining the game may be worth the candle. relatively low-risk ones, One interestingimplicationof this argumentis that rural-to-urban migrationdecisions by individualscan now be seen not as a response to their risk-takingor risk-loving properties-the argumentso far, and for long, dominatingthe literature12-but as a manifestationof their risk avoidance. A second interesting implication is a policy-related one already mentioned in the preceding section: if stemming the migrationflow of ruralincome-earningacwere the order of the day, transformation be tivity into a less risky propositionmay highly effective.
12 Those who have the highest propensityto migrateare "the dynamicrisk-taking surroundings beings who have a high capacityto detach themselvesfrom the traditional environment" andadaptthemselvesto the unfamiliar (GianS. Sahota,"An Econometric Analysis of Internal Migrationin Brazil," Journal of Political Economy 76, no. 2 [March/April1968]: 220; emphasis added). See also Simon Kuznets, "Introduction: and EconomicGrowth,"in PopulationRedistribuRedistribution, Migration Population

American Interrelations,ed. Hope T. Eldridgeand Dorothy S. Thomas (Philadelphia: PhilosophicalSociety, 1964),p. xxxii; and GunnarMyrdal,Asian Drama: An Inquiry into thePovertyof Nations (New York:TwentiethCenturyFund, 1968),pp. 2140,2148.

tion and Economic Growth in the United States, 1870-1950: Demographic Analysis and

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