Rural-urban Migration and Economic Growth in Developing Countries

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: 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