DP17086 Macroeconomic Development, Rural Exodus, and Uneven Industrialization

Author(s): Tomas Budi, Josep Pijoan-Mas
Publication Date: March 2022
Date Revised: March 2022
Keyword(s): internal migration, Internal Trade, spatial inequality, structural change
JEL(s): F16, F41, N10, O11, O41, R12, R13
Programme Areas: International Trade and Regional Economics, Development Economics, Economic History, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17086

Economic development and industrialization are typically led by a few regions within a country. The initially agrarian regions may catch up and industrialize -as in the U.S. 1880 to 1940- or they may fail to industrialize, experience a population exodus, and help industrialization elsewhere -as in Spain 1940 to 2000. To understand the emergence and consequences of each pattern, we build a simple model of structural change with multiple locations and sectors where both internal migration and internal trade are costly. We show that changes in sectoral pro- ductivity, migration costs, or trade costs on their own cannot produce a development process with rural exodus and industrialization failure in initially agrarian regions. We next calibrate the model for the development experience of Spain and find that the large rural exodus and uneven industrialization was originated by an increase in economic opportunities in more industrial regions together with a decline in migration costs towards these same regions. The rural exodus accelerated growth and the cycle of industrialization and de-industrialization within the country, and it completely explains the lack of industrialization in laggard areas. This is because the most advanced regions could only lever up their industrial comparative advantage thanks to the massive inflow of labor. Finally, a rural exodus cannot be averted in the long run by policies increasing industrial productivity in the laggard regions because these induce faster structural change within the country, making the industrial sector less relevant over time; rather, avoiding a rural exodus requires large productivity increases in all sectors of laggard regions.