DP17086 Macroeconomic Development, Rural Exodus, and Uneven Industrialization
Economic development and industrialization are typically led by a few regions within a country. The initially laggard 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. In the model, internal migrations change the relative labor demand across sectors at the local level and hence act as a force of within- region structural change and uneven paths to industrialization. We calibrate our economy to the development experience of Spain, and find that its large rural exodus and uneven regional industrialization were originated by the combination of a decline in migration costs towards the most industrial areas together with an early divergence in sectoral productivities across regions. More importantly, internal migrations fully explain the lack of industrialization in laggard areas, and accelerated growth and structural change at the aggregate level. Finally, we show how variation in changes of migration costs and in patterns of convergence of sectoral productivities across locations help explain cross-country heterogeneity in development patterns.