Agglomeration, Migration and Rural-Urban Transformation in Ethiopia - CGE Analysis


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Ethiopian Development Research Institute (EDRI) and International Food Policy Research Institue (IFPRI), Sevnth International Conference on Ethiopian Economy, EEA Conference Hall, Addis Ababa, June 24, 2010

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  • 0.08 from previous study (citation?). 012 from Shenggen’s general estimates on returns to public investment in rural areas in India, China, Tanzania and Uganda (bit on the low side: could be as much as 0.2).
  • In reality you get growth effects in recipient region because of faster labor supply growth (from in-migration)
  • Agglomeration, Migration and Rural-Urban Transformation in Ethiopia - CGE Analysis

    1. 1. ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTE<br />Agglomeration, migration and rural-urban transformation in Ethiopia<br />Paul Dorosh and James Thurlow<br />IFPRI ESSP-II<br />Ethiopian Economic Association Conference<br />June 24, 2010<br />Addis Ababa<br />1<br />
    2. 2. Overview<br />Growth and internal migration in Ethiopia<br />Regional economywide model<br />Scenario 1: Baseline or “business-as-usual” growth<br />Scenario 2: Accelerating urban migration<br />Scenario 3: Reallocating public investment<br />Summary and conclusions <br />
    3. 3. Ethiopia: Economic Structure1999/00 – 2008/09<br />Source: Calculated from World Bank, World Development Indicators data. <br />3<br />
    4. 4. Ethiopia: Urbanization<br />4<br />Ethiopia is urbanizing faster than people think!!!<br />
    5. 5. Ethiopia: Alternative Urbanization Estimates<br />5<br />
    6. 6. Ethiopia: Percent Population connected to Urban Agglomeration<br />6<br />Source: Schmidt and Kedir (2009)<br />
    7. 7. Ethiopia: Development Budget 1999/00 and 2007/08<br />7<br />Source: Ministry of Finance and Economic Development data.<br />
    8. 8. Agro-ecological Zones (AEZ’s): “3 Ethiopias” split into 5 AEZs<br />Source: 2005/06 EDRI Social Accounting Matrix.<br />8<br />
    9. 9. 1. Growth and internal migration in Ethiopia Current trends<br />Rapid economic growth, especially in major cities<br />Greater public capital investment in larger urban centers<br />Highest public capital per person in major cities (4x rural)<br />BUT slow rural-to-urban migration<br />About 0.1% of rural and small town workforce moves to major cities each year (about 1.9% of major cities’ workforce)<br />Could be due to many factors, such as…<br />Strong agricultural performance (i.e., on-farm opportunities)<br />Land tenure system (i.e., ties people to farm land)<br />
    10. 10. 1. Growth and internal migration in Ethiopia Policy questions<br />Would increased migration to major cities accelerate economic growth via agglomeration effects?<br />(i.e., productivity spillovers from densely concentrated populations)<br />Would it come at the cost of higher national poverty?<br />(i.e., rural “brain-drain”; increased competition in non-farm product markets; lower agric. production and higher food prices; etc)<br />What are the trade-offs between investing in either rural areas, small towns, or major cities?<br />(i.e., in terms of national economic growth or poverty reduction)<br />
    11. 11. 2. Regional economywide model Basic structure of the economy<br />Producers<br />Rural areas<br />Agriculture<br />Consumers<br />Migration<br />National product<br />market <br />Households<br />Towns<br />Non-agriculture<br />Cities<br />Non-agriculture<br />
    12. 12. 2. Regional economywide model Dimensions of the model with EDRI SAM<br />3 regions (cities, towns, and rural areas)<br />69 sectors (incl. regional non-tradables, e.g. construction)<br />3 labor skill categories (skilled, semi-skilled and unskilled)<br /> 3 segmented markets (rural, town, cities) <br />Agricultural land and livestock capital (rural areas only)<br />3 nonagricultural capital stocks (i.e., by the 3 regions)<br />6 representative households (regions x poor/non-poor)<br />
    13. 13. 2. Regional economywide model Dynamic features<br />Recursive dynamic<br />Endogenous capital accumulation: Past investment determines current capital supply (i.e., putty-clay)<br />Exogenous national population and labor growth<br /> BUT endogenous migration (i.e., regional labor supply)<br />Agglomeration economies in small towns & major cities: <br /> Based on labor supply and per capita public capital<br />
    14. 14. 2. Regional economywide model Internal migration functions<br />Number of migrants (M) from region r to region r’ in time period t depends on relative wages (W) and base-year migration rate (m):<br />Total labor supply (LS) in time period t includes… <br /> (i) exogenous population growth g<br /> (ii) net in-migration <br />
    15. 15. 2. Regional economywide model Agglomeration and technical change<br />Total factor productivity (TFP) index depends on… <br /> (i) exogenous rate of technical change c<br /> (ii) labor/population agglomeration M (urban only)<br /> (iii) per capita public capital stock Kpc<br />Per capita public capital depends on (i) share s of new public capital NPK, (ii) depreciation rates d, and (iii) regional labor supply LS:<br />
    16. 16. 2. Regional economywide model Numerical example<br />Agglomeration and “congestion” elasticities determine whether TFP increases with pop growth or in-migration.<br />Example: 2% pop growth only (no new pub. investment)<br /> (i.e., g=0.02, m=0, d=0, c=0 and NPK=0) <br />
    17. 17. 2. Regional economywide model Two sets of simulations<br />Baseline or business-as-usual scenario<br />Increasing current rural-to-urban migration rates<br />Double, Triple, and Quadruple<br />Reallocate 10% of existing public investment towards…<br />Cities, Towns, or Rural areas<br />
    18. 18. 3. Baseline scenario Assumptions<br />2% annual population and labor supply growth (national)<br />2% annual crop land and livestock stock expansion<br />Exogenous component of TFP growth drawn from CAADP report and recent national accounts<br />0.4% and 0.9% annual migration in the base year from rural areas and towns to major cities, respectively<br />Based on 1994 census and 1999 LFS (see Golini et al. 2001)<br />Aggl. elasticity = 0.08 (towns and cities only) <br />Kpc elasticity = 0.12 (towns and cities only)<br />
    19. 19. 3. Baseline scenario Growth and poverty outcomes, 2005-2025<br />GDP growth: 5.4% p.a.<br /> Agriculture: 3.3%<br /> Industry: 6.5%<br /> Services: 7.0%<br />Growth favors major cities and urban areas<br />Migration to cities<br />Larger welfare improvements for non-poor households, BUT poor still benefit<br />Welfare = equivalent variation<br />
    20. 20. 3. Baseline scenario Contribution to national economic growth rate<br />Total GDP grows at 5.4% p.a. during 2005-2025<br />68% of economic growth comes from labor and private capital<br />We assume public capital stocks expand at 6.5% per year, which is below current 9% accumulation.<br />Public capital and agglomeration generate only a 6% of total growth<br />The rest is from sources exogenous to the model<br />
    21. 21. 4. Accelerating migration to major cities Results: Migration flows and urbanization<br />Increase base-year migration rate to urban centers (m)<br />
    22. 22. 4. Accelerating migration to major cities Results: Relative wages<br />Urban pop. share tapers due to wage convergence, which reduces incentive to migrate from rural to urban areas<br />Average rural labor wages relative to average urban wages (towns + cities)<br />
    23. 23. 4. Accelerating migration to major cities Results: Regional economic growth<br />Faster migration to major cities raises national growth GDP rate (BUT at a diminishing rate)<br />Favors urban industry and services<br />Rural out-migration lowers agricultural production slightly<br />Overall growth concentrated in major cities, with few spillovers to rural areas<br />
    24. 24. 4. Accelerating migration to major cities Results: Incomes and poverty<br />Faster economic growth increases national welfare (measured by EV)<br />Larger declines in average welfare for households in cities due to job scarcity and congestion<br />Smaller benefits for poorer households, but some gains for rural households<br />
    25. 25. 4. Reallocating public investmentsInvestment scenarios<br />We increase the share of new public capital allocated to either cities, towns or rural areas by 10%<br />No new public capital is created<br />Share of new public capital stocks allocated to each region (%)<br />
    26. 26. 4. Reallocating public investmentsResults: Regional economic growth<br />Rural-focused investment slows national economic growth, while urban investment accelerates it.<br />Raising urban investment favors industry and services, but reduces agriculture<br />Conversely, increasing agricultural productivity reduces nonagricultural growth (due to resource competition e.g. capital)<br />
    27. 27. 4. Reallocating public investmentsResults: Welfare and poverty<br />Despite slower economic growth, shifting public resources towards rural areas significantly improves national household welfare<br />Rural investment benefits both rural and urban households<br />Clear trade-offs between growth and welfare objectives<br />
    28. 28. 5. Summary<br />Ethiopia’s urbanization levels are still very low in 2025 under the baseline scenario (despite high urban growth)<br />Accelerated urbanization… <br />Increases economic growth<br />Improves rural welfare <br />Reduces the rural-urban divide <br />However, without supporting public investment in urban areas, there is simply an “urbanization of poverty” and rising urban inequality.<br />
    29. 29. 5. Summary<br />HOWEVER, there are trade-offs when public capital is reallocated to urban centers (i.e., faster economic growth but a deterioration of poor households’ welfare) <br />By contrast, rural investment generates less growth, it leads to more significant welfare improvements.<br />To further stimulate economic development and structural transformation in Ethiopia requires a judicious balance of…<br />Reforms to overcome the constraints to internal migration<br />Investments in urban areas to maintain government capital per capita in urban areas <br />Allocation of additional new resources to rural areas<br />