In the next 30 years, the world’s population is expected to increase by 2.5 billion persons. Most of this growth will occur in the cities of developing countries, which are adding about 55 million residents a year. These working papers are focused on the megacities--defined here as large, rapidly growing cities of 8 million or more residents. Megacities merit special attention because of the magnitude of their population increases and the enormity of the challenges involved in providing services to such rapidly growing populations. At the same time, many of the innovations and changes discussed in these papers are applicable to a broad range of cities. Early recognition of future growth can enable a city to address challenges before they become overly complex or expensive.

In the twenty-first century, the economic and social development of urban areas will be influenced by continued global economic integration and the need for a nation’s commerce to be competitive in the global economy. City businesses will have to compete for investment and export markets in the global marketplace. A successful transition from industries relying on low-wage labor and cheap raw materials toward technology- and knowledge-based systems of production and services will require better-educated and more-skilled workers, effective infrastructure, and responsive public and private organizations.

In the two decades since the United Nations Conference on Human Settlements (Habitat) was held in Vancouver, there have been significant advances in both technologies and management strategies that can be applied to address megacity challenges. Nevertheless, rapid urbanization has outpaced the ability of governments to provide adequate shelter and basic services to the urban poor. Given the increasing importance of these challenges, the world’s academies of science and engineering were asked by Dr. Wally N’Dow, Secretary General of the Second United Nations Conference on Human Settlements, to organize a scientific forum that would develop a joint statement for presentation to the United Nations delegates at the Conference on Human Settlements (Habitat II) in Istanbul in June 1996.

The U.S. National Academy of Sciences/National Research Council is also undertaking a study of the many challenges faced by megacities in the developing world. Results of the full study are scheduled for publication later this year by the National Research Council. The working papers presented here--on labor markets, water and sanitation services, and transportation--have been prepared for that study by three panels of the National Research Council.

Commission on Behavioral and Social Sciences and Education

Harry Richardson, University of Southern California, Chair

Jere R. Behrman, University of Pennsylvania

Ellen M. Brennan, United Nations

Alejandra Cox Edwards, The World Bank

Subbiah Kannappan, Michigan State University

Barney Cohen, Commission on Behavioral and Social Sciences and Education

Trish DeFrisco, Commission on Behavioral and Social Sciences and Education

Connie Reges, Office of International Affairs

Development experts are concerned with fostering economic growth, alleviating poverty, protecting the environment, and improving the general standard of living of people in developing countries. Much of this work is directed toward either creating employment or raising labor earnings because at the bottom of the earnings scale, labor earnings comprise the most significant portion of total income, and hardship and poverty are often the direct results of insufficient access to adequate employment opportunities.

Developing countries span a wide range of income and development levels, and their megacities reflect these differences. Yet most of the megacities share some key labor market characteristics: a formal manufacturing sector that is usually dwarfed (in employment terms) by the service sector; a large government sector, often riddled with inefficiencies; and an informal sector whose size depends on the level of economic development, business cycle influences, and the degree of government tolerance and support. Moreover, almost all megacities have been impacted substantially by globalization and the opening up of world markets; these trends have accelerated the need for increasingly flexible labor markets.

This paper addresses the problem of the need to expand productive capacity in developing-country megacities in order to create a billion new jobs over the next 35 years. Labor markets in developing-country megacities are vulnerable to several problems that may be amenable to policy intervention. These include the following:

• Unemployment and low-productivity employment

• Poverty and income inequality

• Job mobility constraints

• Lack of protection for workers

• Big firm bias

What policy prescriptions are available to alleviate some of these conditions? Depending on the extent of market failure and the importance assigned to distributional issues, governments are probably most effective in improving urban labor markets when they assume a modest role (World Bank, 1995a). The most promising opportunities for alleviating megacity labor market problems through policy intervention are as follows.

1. The promotion of economic growth and economic (and political) stability. Economic growth offers the best guarantee of expanded employment opportunities, higher wages, and labor productivity growth. Appropriate macroeconomic policies (e.g., fiscal discipline, control of inflation, and financial reforms), combined with both tariff and nontariff trade liberalization, offer the most promising strategy for promoting employment growth and generating enough resources to pay for the infrastructure investments needed to achieve income equity.

2. For this strategy to work efficiently, the economy in general and the labor market in particular need to adjust quickly to changing market conditions. Many developing countries have labor policies in place (such as minimum wage laws, job security provisions, job-related housing provision, pension systems, and centralized--often government-controlled--labor unions) that, when enforced (often they are not), aggravate labor market distortions and impede adjustments. Deregulation of the labor market offers prospects for increasing its flexibility, especially by recognizing that policy interventions should work with rather than against market forces and should pay attention to the incentives driving the behavior of individuals and households. At the same time, improved access to credit markets for potential entrepreneurs, as well as to job information and to skills acquisition for potential employees, can help megacities’ labor markets run more efficiently.

3. Whereas redistribution policies tampering with spatial (geographical) variations in labor supply and demand are unlikely to be effective, efficiency-oriented urban policies (e.g., low-cost improvements in transportation, broadly based educational investments, privatization of government services, access to credit for small-scale enterprises, and creation of a favorable entrepreneurial environment) can promote labor productivity growth and improve the competitive efficiency of megacities, directly impacting macroeconomic performance.

Finally, with respect to the role of science and technology, more rapid diffusion of known and already widely applied technologies (e.g., computer information systems, cellular telephones) may transform the structure and composition of employment in developing-country megacities, especially given the global competitive environment. These and similar measures will be critical to avoid widespread urban unemployment and underemployment in the megacities of the developing world.