Rural-urban Migration and Economic Growth in Developing Countries http://ideas.repec.org/p/red/sed004/241.

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Rural-urban Migration and Economic Growth in Developing

Countries
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Author Info
D. Sirin Saracoglu
Terry L. Roe

Additional information is available for the following registered author(s):

Terry Lee Roe

Durdane Saracoglu

Abstract

Rural-urban migration has long been associated with economic development and growth in the economic
literature. In particular, Todaro and Harris-Todaro-type probabilistic models that examine migration have
concentrated on the expected wage disparities between rural and urban (formal) labor markets as a driving
force behind migration decision. These models, which are static and partial equilibrium in nature, have
virtually ignored the cost-of-living differentials across regions that arise from the presence of regional
non-traded (home-) goods. Moreover, even in dynamic general equilibrium models, equations specifiying
labor market clearing conditions have neglected to recognize a missing endogenous variable, the
households’ choice of residency, and the corresponding equations necessary to cause the labor market to
clear as well. Effectively, adding these conditions to the model allows agents to move from one region to
another and to bring their utility function and budget constraint with them to the new region of residency.
This condition profoundly affects the spatial distribution of economic activity. Furthermore, when factor
market imperfections are modeled, e.g., the segmentation in labor and capital markets across regions, these
factors earn different rates of return thus greatly influencing the pattern of spatial economic development.
The main objectives of this paper are to model the residency choice decision in the context of a dynamic
general equilibrium economy, to identify the channels through which segmentation in capital markets in
developing countries induces migration from rural to urban regions, and to explain how uneven economic
growth may emerge as a consequence. This paper incorporates cost-of-living and income differentials across
regions into the migration decision of households in a dynamic general equilibrium setting. With the use of a
dynamic general equilibrium model, we can capture the migration pattern as a response to changes in cost-of-
living, as well as to the evolution of real wage differentials as capital accumulates due to household savings
and as the rural-urban production sectors respond to the Rybczynski-like effects of competition in factors of
production. Using a model that extends the standard Ramsey-type growth model, we investigate the
endogenous pattern of migration in a developing country economy in the process of economic growth and
structural change. The standard Ramsey-type growth model is thus extended to include two types of
households in a regional, multi-sectoral environment with capital market segmentation. In particular, to best
assess the impact of capital market segmentation on the economy as a whole and on specific macroeconomic
variables, a policy experiment is conducted under the cases of with and without capital market segmentation:

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Rural-urban Migration and Economic Growth in Developing Countries http://ideas.repec.org/p/red/sed004/241.html

when a policy “shock†is introduced, the economy’s performance, as well as migration patterns are
examined when there is segmentation in capital markets, and when there is a perfect capital market. The
policy experiment is conducted by lowering the labor tax rates levied on the employers in the urban formal
sector. The model is calibrated to Turkish economy for the year 1997, which has a large rural population at
about 42 percent of the total population as of that year. Data are compiled from Turkish National Accounts
Statistics and Labor Statistics. Initial results from numerical simulations show that in a model economy with a
large rural population and segmentation in its capital markets, a policy change in the economy such as
reducing the labor taxes imposed in the urban formal sector induces migration from rural to urban areas, and
this migration continues along the transition path to a new long run equilibrium. Large drops in output in rural
areas are detected, whereas the output in the urban region grows along the transition path. However, the same
economy reacts to the same policy change much differently after it undergoes an institutional reform such as
the integration of its capital markets. As the economy adjusts to a new equilibrium once a policy change is
introduced, relative to the case with segmented capital markets, no large changes in the macroeconomic
variables occur. Especially, rural households choose to remain in the rural region

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Publisher Info
Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 241.

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Date of creation: 2004
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Handle: RePEc:red:sed004:241

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York University New York, NY 10003
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Zimmermann).

Related research
Keywords: Rural-urban migration; residency choice; capital market segmentation;

Find related papers by JEL classification:

D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors;
Shadow Economy; Institutional Arrangements
R23 - Urban, Rural, and Regional Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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