The speed at which structural change from agriculture to non-agriculture takes place is a key determinant of successful aggregate growth in developing countries. We show that crop-level differences in agricultural technology – the coefficients on factor inputs in the production function – account for a substantial portion of cross-country differences in agricultural labor productivity, agricultural labor share, and per capita income. Using a sample of 100 countries we document technology differences across major crop types and illustrate their quantitative implications for structural change and development. Counterfactually eliminating technology heterogeneity in our sample results in 25% lower variance in log income per capita, and 60% higher median per capita income.
Today the world’s fastest-growing cities lie in low-income countries, unlike the historical norm. Also unlike the “killer cities” of history, cities in low-income countries grow not just through in-migration but also through their own natural increase. First, we use novel historical data to document that many poor countries urbanized at the same time as the post-war urban mortality transition. Second, we develop a general equilibrium model of location choice with heterogeneity in demographics and congestion costs across locations to account for this. In the model, people prefer to live in low-mortality locations, and the aggregate rate of population growth and the locational choice of individuals interact. Third, we calibrate the model to data from a sample of poor countries, and find that informal urban areas (e.g. slums) grew in large part because they were able to absorb additional population relatively more easily than other locations. We show that between 1950 and 2005 the urban mortality transition by itself could have doubled the urbanization rate as well as the size of informal urban areas in this sample. Of these effects, one-third can be attributed to the direct amenity effect of lower urban mortality rates, while the remainder is due to higher population growth disproportionately pushing people into informal urban areas. Fourth, policy analysis suggests that family planning programs might be as effective as urban infrastructure and institution at transforming cities in poor countries into “engines of growth”
We provide a methodology to estimate the elasticity of agricultural output with respect to land - the Malthusian constraint - using variation in rural densities across different locations. We use district-level data from around the globe on rural densities and inherent agricultural productivity to estimate the elasticity for various sub-samples. We find the elasticity is highest in areas that are suitable for temperate crops such as wheat or rye, and loosest in areas suitable for (sub)-tropical crops such as cassava or rice. We show theoretically that a higher elasticity results in greater sensitivity of non-agricultural employment and real income per capita to shocks in population size and productivity, and confirm this with evidence from the post-war mortality transition.
We examine heterogeneity in the elasticity of agricultural output with respect to labor across countries and the effect this has on structural change and development. Employing panel data from 128 countries over a forty year period we find distinct heterogeneity in the elasticity of agricultural output with respect to labor, which we refer to as heterogeneity in agricultural technology. To do this we employ panel time-series methods that explicitly allow for parameter heterogeneity, while also controlling for unobserved shocks to productivity using common factors. We find that the elasticity is lowest in countries with temperate and/or cold climate regions (around 0.15), but much higher in countries including tropical or highland regions (around 0.55). The elasticities are not correlated with development levels or with stocks of other agricultural inputs, but reflect differences in agricultural technology in different climate zones. We then use a standard model of a two-sector economy with non-homothetic preferences for agricultural goods to show that this agricultural elasticity with respect to labor determines the speed of structural change following changes in agricultural productivity or population. Calibration shows shifts in labor allocations and welfare will be 2–3 times larger in temperate regions than in tropical or highland regions for any given shock when economies are closed. In open economies the welfare effects are similar across climate zones, but the shift in labor allocations in response to world price or productivity shocks are 2-3 times larger in tropical or highland regions.
We document a strong positive relationship between natural resource exports and urbanization in a sample of 116 developing nations over the period 1960–2010. In countries that are heavily dependent on resource exports, urbanization appears to be concentrated in “consumption cities” where the economies consist primarily of non-tradable services. These contrast with “production cities” that are more dependent on manufacturing in countries that have industrialized. Consumption cities in resource exporters also appear to perform worse along several measures of welfare. We offer a simple model of structural change that can explain the observed patterns of urbanization and the associated differences in city types. We note that although the development literature often assumes that urbanization is synonymous with industrialization, patterns differ markedly across developing countries. We discuss several possible implications for policy.
The world is becoming more and more urbanized at every income level, and there has been a dramatic increase in the number of mega-cities in the developing world. This has led scholars to believe that development and urbanization are not always correlated, either across space or over time. In this paper, we use historical data at both the country level and city level over the five centuries between 1500–2010 to revisit the topic of “urbanization without growth” (Fay and Opal, 2000). In particular, we first establish that, although urbanization and income remain highly correlated within any given year, urbanization is 25–30 percentage points higher in 2010 than in 1500 at every level of income per capita. Second, while historically this shift in urbanization rates was more noticeable at the upper tail of the income distribution, i.e. for richer countries, it is now particularly visible at the lower tail, i.e. for poorer countries. Third, these patterns suggest that different factors may have explained the shift in different periods of time. We use the discussion of these factors as an opportunity to provide a survey of the literature and summarize our knowledge of what drives the urbanization process over time.
For a set of 14 developing countries I evaluate whether differences in the marginal product of human capital between sectors - estimated from individual-level wage data - have meaningful effects on aggregate productivity. Under the most generous assumptions regarding the homogeneity of human capital, my analysis shows that equalizing the marginal product of human capital between sectors leads to gains in output of less than 5% for most countries. These estimated gains of reallocation represent an upper bound as some of the observed differences in marginal products between sectors are due to unmeasured human capital. Under reasonable assumptions on the amount of unmeasured human capital the gains from reallocation fall well below 3%. Compared to similar estimates made using data from the U.S., developing countries would gain more from a reallocation of human capital, but the differences are too small to account for a meaningful portion of the gap in income per capita with the United States.
The literature has shown that the implied welfare gains from financial integration are very small. We revisit these findings and document that welfare gains are substantial if capital goods are not perfect substitutes. We use a model of optimal savings where the elasticity of substitution between capital varieties is less than infinity, but more than the value that would generate endogenous growth. This production structure is consistent with empirical estimates of the actual elasticity of substitution between capital types, as well as with the relatively slow speed of convergence documented in the literature. Calibrating the model, welfare gains from financial integration are equivalent to a 9% increase in consumption for the median country, and 14% for the most capital-scarce. This rises substantially if capital’s share in output increases even modestly above 0.3, and remains large if inflows of foreign capital are limited to a fraction of the existing capital stock.
This paper examines the relationship of inequality to school funding in counties of the U.S. in 1890. Inequality, measured here on the basis of farm-size distributions, is found to be negatively related to local school property tax revenues across the whole sample of 1345 rural counties. However, further analysis shows that this relationship is not consistent across the sample. In the North, there is a significant negative relationship between inequality and school funding, and this relationship is shown to be consistent with the fact that assessed values of property did not rise linearly with wealth. Across the South, there is no distinct relationship between inequality and school funding. The results also indicate that inequality in the South cannot directly explain the gap in school funding with the North, in the sense that redistributing farms in the South to match the Northern distributions leads to no predicted increase in school funding.
Wide differences in labor productivity are observed between agriculture and industry in most developing countries. Research suggests that these differences - often denoted a “dual economy” effect — can explain a significant portion of low output per capita levels in these countries. A central input to the labor productivity calculation is the aggregate labor effort in the agricultural sector. Using findings from the Rural Income Generating Activity (RIGA) database, I reconsider the measure of labor productivity in agriculture and industry. I use several methods to extract information on labor effort and human capital from the household data in RIGA, and this is used to estimate the aggregate labor effort in the agricultural sector. With these new estimates, dual economy effects are found to be less severe for most of the RIGA countries. Using these estimates to adjust a wider sample of country-level data shows that the share of variation in output per capita explained by dual economy effects is around half of previous estimates. Copyright Eurasia Business and Economics Society 2013
This paper brings together the development literature on land tenure with current research on population and long-run growth. Land-owners make a decision between fixed-rent, fixed-wage, and share-cropping contracts to hire tenants to operate their land. The choice of tenure contract affects the share of output going to tenants, and within a simple unified growth model this affects the relative price of food and therefore fertility. Fixed-wage contracts elicit the lowest fertility rate and fixed-rent contracts the highest, with share-cropping as an intermediate case. The implications of this for long-run growth depend on the assumptions one makes about scale effects in the aggregate economy. With increasing returns to scale, as in several models of innovation, fixed-rent contracts imply higher growth through a market size effect. Without such increasing returns, though, fixed-rent contracts lower output per capita through a depressing effect on accumulation.
This article shows, in a two-sector Malthusian model of endogenous population growth, that output per capita, population density, and industrialization depend upon the labor intensity of agricultural production. Because the diminishing returns to labor are less pronounced, high labor intensity (as in rice production) leads not only to a larger population density but also to lower output per capita and a larger share of labor in agriculture. Agronomic and historical evidence confirm that there are distinct, inherent differences between rice and wheat production. A calibration of the model shows that a relatively small difference in labor intensity in agriculture can account for a large portion of the observed differences in industrialization, output per capita, and labor productivity between Asia and Europe prior to the Industrial Revolution. Significantly, these differences can be explained even though sector-level total factor productivity levels and the efficiency of factor markets are held constant in the two regions.
This research suggests that favorable geographical conditions, that were inherently associated with inequality in the distribution of land ownership, adversely affected the implementation of human capital promoting institutions (e.g., public schooling and child labor regulations), and thus the pace and the nature of the transition from an agricultural to an industrial economy, contributing to the emergence of the Great Divergence in income per capita across countries. The basic premise of this research, regarding the negative effect of land inequality on public expenditure on education is established empirically based on cross-state data from the beginning of the 20th century in the United States.
This paper brings together development accounting techniques and the dual economy model to address the role that factor markets have in creating variation in aggregate total factor productivity (TFP). Development accounting research has shown that much of the variation in income across countries can be attributed to differences in TFP. The dual economy model suggests that aggregate productivity is depressed by having too many factors allocated to low productivity work in agriculture. Data show large differences in marginal products of similar factors within many developing countries, offering prima facie evidence of this misallocation. Using a simple two-sector decomposition of the economy, this article estimates the role of these misallocations in accounting for the cross-country income distribution. A key contribution is the ability to bring sector specific data on human and physical capital stocks to the analysis. Variation across countries in the degree of misallocation is shown to account for 30 — 40% of the variation in income per capita, and up to 80% of the variation in aggregate TFP.
This paper provides a dynamic model of the dual economy in which differences in productivity across sectors arise endogenously. Rather than relying on exogenous price distortions, duality arises because of differences between sectors in the separability of their fertility and labor decisions. The model demonstrates how a dual economy will originate, persist, and eventually disappear within a unified growth framework. It is also shown that agricultural productivity growth will exacerbate the inefficiencies of a dual economy and slow down long-run growth.
The unequal distribution of agricultural land is often cited as a source of inefficiency in agriculture. Previous cross-country studies of agricultural productivity differences, though, have not considered land inequality. This article addresses this issue by using cross-country data on inequality in operational holdings of agricultural land from Deininger and Squire (1998) . In an estimation of an agricultural production function, the Gini coefficient for land holdings is found to have a significant negative relationship with productivity. This is consistent with the existence of heterogeneity in productivity by farm size within countries. A one standard deviation drop in the Gini coefficient implies an increase in productivity of 8.5%. Copyright 2007, Oxford University Press.