ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTE

Agglomeration, migration and rural-urban transformation in Ethiopia

Paul Dorosh and James ThurlowIFPRI ESSP-II

Ethiopian Economic Association ConferenceJune 24, 2010Addis Ababa

1

Overview

1. Growth and internal migration in Ethiopia

2. Regional economywide model

3. Scenario 1: Baseline or “business-as-usual” growth

4. Scenario 2: Accelerating urban migration

5. Scenario 3: Reallocating public investment

6. Summary and conclusions

3

Ethiopia: Economic Structure1999/00 – 2008/09

Source: Calculated from World Bank, World Development Indicators data.

38

40

42

44

46

48

50

52

0

20

40

60

80

100

120

140

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

(200

8/09

)

Agr

ic S

hare

of G

DP

(%)

billi

on (

1999

/200

0) B

irr

Agriculture Industry Electricity and Water

Construction Other Private Services Public Administration

Agric Share of GDP

4

Ethiopia: UrbanizationOfficial Agglomeration

Estimate Index(percent) (percent)

1984 11.4% 3.7%1994 13.7% 7.1%2007 15.9% 14.2%

(mns people) (mns people)1984 4.55 1.481994 7.33 3.802007 11.72 10.50

(growth rate) (growth rate)1984-1994 4.9% 9.9%1994-2007 3.7% 8.1%1984-2007 4.2% 8.9%

Ethiopia is urbanizing faster than people think!!!

5

Ethiopia: Alternative Urbanization Estimates

0

2

4

6

8

10

12

14

1984 1994 2007

(mill

ions

)

Agglomeration Index Official CSA

6

Ethiopia: Percent Population connected to Urban Agglomeration

1984 1997 2007 -

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

0%

10%

20%

30%

40%

50%

60%

Under 1 hour 1- 3 hoursShare of Total Population

Source: Schmidt and Kedir (2009)

7

Ethiopia: Development Budget 1999/00 and 2007/08

Source: Ministry of Finance and Economic Development data.

1999/00 2007/080

5

10

15

20

25

30

35

RuralUrbanOther

(bn

2007

/08

birr

)

8

Agro-ecological Zones (AEZ’s): “3 Ethiopias” split into 5 AEZs

Source: 2005/06 EDRI Social Accounting Matrix.

1. Growth and internal migration in Ethiopia Current trends

• Rapid economic growth, especially in major cities

• Greater public capital investment in larger urban centers• Highest public capital per person in major cities (4x rural)

• BUT slow rural-to-urban migration– About 0.1% of rural and small town workforce moves to major

cities each year (about 1.9% of major cities’ workforce)

• Could be due to many factors, such as…– Strong agricultural performance (i.e., on-farm opportunities)– Land tenure system (i.e., ties people to farm land)

1. Growth and internal migration in Ethiopia Policy questions

• Would increased migration to major cities accelerate economic growth via agglomeration effects?(i.e., productivity spillovers from densely concentrated populations)

• Would it come at the cost of higher national poverty?(i.e., rural “brain-drain”; increased competition in non-farm product markets; lower agric. production and higher food prices; etc)

• What are the trade-offs between investing in either rural areas, small towns, or major cities?(i.e., in terms of national economic growth or poverty reduction)

2. Regional economywide model Basic structure of the economy

Rural areasAgriculture

TownsNon-agriculture

CitiesNon-agriculture

National productmarket

Producers

Migration

Households

Consumers

2. Regional economywide model Dimensions of the model with EDRI SAM

• 3 regions (cities, towns, and rural areas)

• 69 sectors (incl. regional non-tradables, e.g. construction)

• 3 labor skill categories (skilled, semi-skilled and unskilled)3 segmented markets (rural, town, cities)

• Agricultural land and livestock capital (rural areas only)

• 3 nonagricultural capital stocks (i.e., by the 3 regions)

• 6 representative households (regions x poor/non-poor)

2. Regional economywide model Dynamic features

• Recursive dynamic

• Endogenous capital accumulation: Past investment determines current capital supply (i.e., putty-clay)

• Exogenous national population and labor growthBUT endogenous migration (i.e., regional labor supply)

• Agglomeration economies in small towns & major cities: Based on labor supply and per capita public capital

2. Regional economywide model Internal migration functions

1,

1,'',1,,',

tr

trrrtrtrr W

WmLSM

'

,',,,'1,, 1r

trrtrrtrtr MMgLSLS

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):

Total labor supply (LS) in time period t includes… (i) exogenous population growth g (ii) net in-migration

2. Regional economywide model Agglomeration and technical change

12.0

0,

,08.0

0,

,0,, 1

r

tr

r

trtrtr Kpc

Kpc

M

McTFPTFP

trtrtrtrtr NPKsdLSKpcLSKpc 11,1,,,

Total factor productivity (TFP) index depends on… (i) exogenous rate of technical change c (ii) labor/population agglomeration M (urban only)(iii) per capita public capital stock Kpc

Per capita public capital depends on (i) share s of new public capital NPK, (ii) depreciation rates d, and (iii) regional labor supply LS:

2. Regional economywide model Numerical example

• Agglomeration and “congestion” elasticities determine whether TFP increases with pop growth or in-migration.

• Example: 2% pop growth only (no new pub. investment)(i.e., g=0.02, m=0, d=0, c=0 and NPK=0)

0 4 8 12 16 20 24 28 320.85

0.90

0.95

1.00

1.05

1.10

Aggl. elas = 0.08Kpc elas = 0.12TFP index

TFP

inde

x

0 3 6 9 12 15 18 21 24 27 30 330.85

0.90

0.95

1.00

1.05

1.10

Aggl. elas = 0.12Kpc elas = 0.08TFP index

TFP

inde

x

2. Regional economywide model Two sets of simulations

1. Baseline or business-as-usual scenario

2. Increasing current rural-to-urban migration rates– Double, Triple, and Quadruple

3. Reallocate 10% of existing public investment towards…– Cities, Towns, or Rural areas

3. Baseline scenario Assumptions

• 2% annual population and labor supply growth (national)

• 2% annual crop land and livestock stock expansion

• Exogenous component of TFP growth drawn from CAADP report and recent national accounts

• 0.4% and 0.9% annual migration in the base year from rural areas and towns to major cities, respectively– Based on 1994 census and 1999 LFS (see Golini et al. 2001)– Aggl. elasticity = 0.08 (towns and cities only) – Kpc elasticity = 0.12 (towns and cities only)

3. Baseline scenario Growth and poverty outcomes, 2005-2025

• GDP growth: 5.4% p.a.Agriculture: 3.3%Industry: 6.5%Services: 7.0%

• Growth favors major cities and urban areas

• Migration to cities

• Larger welfare improvements for non-poor households, BUT poor still benefit

Welfare = equivalent variation

National

Rural areas

Small town

Major cities

National

Rural areas

Small town

Major cities

National

Rural areas

Small town

Major cities

Poor

Non-poor

Popu

latio

nG

DP

p.c.

Wel

fare

p.c

.

0 1 2 3 4 5

Average annual change (%)

3. Baseline scenario Contribution to national economic growth rate

• Total GDP grows at 5.4% p.a. during 2005-2025

• 68% of economic growth comes from labor and private capital

• We assume public capital stocks expand at 6.5% per year, which is below current 9% accumulation.

• Public capital and agglomeration generate only a 6% of total growth

• The rest is from sources exogenous to the model

17.6%

50.1%

2.9%

2.8%

26.6%

Factors: Labor expansionFactors: Private capitalTFP: agglomeration effectsTFP: Public capital (p.c.)TFP: Exogenous sources

4. Accelerating migration to major cities Results: Migration flows and urbanization

• Increase base-year migration rate to urban centers (m)

07 09 11 13 15 17 19 21 23 2515

16

17

18

19

20

21

22

23

Urb

an p

opul

ation

sha

re (

%)

Baseline

Double

Triple

Quadruple

4. Accelerating migration to major cities Results: Relative wages

• Urban pop. share tapers due to wage convergence, which reduces incentive to migrate from rural to urban areas

Average rural labor wages relative to average urban wages (towns + cities)

07 09 11 13 15 17 19 21 23 250.20

0.22

0.24

0.26

0.28

0.30

0.32

0.34

0.36

Ratio

of r

ural

to u

rban

wag

es

Baseline

Double

Triple

Quadruple

4. Accelerating migration to major cities Results: Regional economic growth

• Faster migration to major cities raises national growth GDP rate (BUT at a diminishing rate)

• Favors urban industry and services

• Rural out-migration lowers agricultural production slightly

• Overall growth concentrated in major cities, with few spillovers to rural areas

Total GDP

Agriculture

Industry

Services

Rural areas

Small urban

Major cities

-0.25 0.00 0.25 0.50 0.75 1.00

Quadruple Triple Double

Average annual change from baseline (%)

4. Accelerating migration to major cities Results: Incomes and poverty

• Faster economic growth increases national welfare (measured by EV)

• Larger declines in average welfare for households in cities due to job scarcity and congestion

• Smaller benefits for poorer households, but some gains for rural households

National

Rural areas

Small town

Major cities

Poor

Non-poor

-2.00 -1.50 -1.00 -0.50 0.00 0.50

Quadruple Triple Double

Average annual change from baseline (%)

4. Reallocating public investmentsInvestment scenarios

• We increase the share of new public capital allocated to either cities, towns or rural areas by 10%

• No new public capital is created

Rural areas Towns Cities Ethiopia

Baseline 9.0 9.6 81.4 100.0

City scenario 19.0 8.5 72.5 100.0

Town scenario 8.0 19.6 72.4 100.0

Rural scenario 4.2 4.4 91.4 100.0

Share of new public capital stocks allocated to each region (%)

4. Reallocating public investmentsResults: Regional economic growth

• Rural-focused investment slows national economic growth, while urban investment accelerates it.

• Raising urban investment favors industry and services, but reduces agriculture

• Conversely, increasing agricultural productivity reduces nonagricultural growth (due to resource competition e.g. capital)

Total GDP

Agriculture

Industry

Services

Rural areas

Small urban

Major cities

-1.00 -0.50 0.00 0.50 1.00

Rural areas Towns Cities

Average annual change from baseline (%)

4. Reallocating public investmentsResults: Welfare and poverty

• Despite slower economic growth, shifting public resources towards rural areas significantly improves national household welfare

• Rural investment benefits both rural and urban households

• Clear trade-offs between growth and welfare objectives

National

Rural areas

Small town

Major cities

Poor

Non-poor

-0.10 0.00 0.10 0.20 0.30

Rural areas Towns Cities

Average annual change from baseline (%)

5. Summary

• Ethiopia’s urbanization levels are still very low in 2025 under the baseline scenario (despite high urban growth)

• Accelerated urbanization… – Increases economic growth– Improves rural welfare – Reduces the rural-urban divide

• However, without supporting public investment in urban areas, there is simply an “urbanization of poverty” and rising urban inequality.

5. Summary

• 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)

• By contrast, rural investment generates less growth, it leads to more significant welfare improvements.

• To further stimulate economic development and structural transformation in Ethiopia requires a judicious balance of…– Reforms to overcome the constraints to internal migration– Investments in urban areas to maintain government capital per

capita in urban areas – Allocation of additional new resources to rural areas