1

Agricultural Growth, Urbanization and Poverty:

Implications of Alternative Development Strategies in Africa

Paul A. DoroshInternational Food Policy Research Institute (IFPRI)

Workshop on “Economic Transformation in West Africa: What it Means for Food Security and Poverty Reduction”

Dakar, SenegalMay 15, 2013

2

Key Development Policies• Sectoral allocation of public investments– Potential trade-offs between investing in agriculture /

rural areas versus industry / urban areas in terms of national economic growth and poverty reduction

• Land and Migration Regulations influencing Rate of Urbanization– Insecure or non-transferable property rights, e.g.

prohibition of sale of land, loss of land rights for those who leave rural areas

– Registration requirements for new migrants to cities

3

Ethiopia: Development Budget 1999/00 and 2007/08

Source: Calculated from Ethiopia Ministry of Finance and Economic Development data.

1999/00 2007/080

5

10

15

20

25

30

35

RuralUrbanOther

(bn

2007

/08

birr

)

4

Economic Structure: Ethiopia and Uganda• Disaggregated national social accounting matrices– Regions (cities, towns and rural areas)

• Agricultural production disaggregated by agro-ecological zones

– Sectors (60 in Uganda : 77 in Ethiopia)• Agriculture: 24% of GDP in Uganda; 48% of GDP in Ethiopia)

– Households (regional poor and non-poor)

Population (%) GDP (%) Poverty rate (%)Eth Uganda Eth Uganda Eth Uganda

National 100.0 100.0 100.0 100.0 40.0 40.0Rural 84.5 84.7 53.3 62.4 41.8 44.3Towns 10.2 9.3 26.4 18.0 35.5 23.7Cities 5.2 6.1 20.4 19.6 19.2 4.8

Source: Dorosh and Thurlow (2012) estimates for 2005 derived from Social Accounting Matrices.

7

Model Summary

• Sectoral and rural economy linkages– National product markets (some non-tradable local services)– Open economy model (i.e., imperfect substitution)– Fixed technical coefficients (i.e., IO table)

• Surplus labor in rural areas– Higher wages in urban industrial sectors

• Internal migration– Limited treatment of remittances

• Agglomeration and technical change

8

Agglomeration and Technical Change

• Total factor productivity (TFP) index depends on… – Labor/population agglomeration LS (urban only)– Per capita public capital stock KPC (urban only)– Exogenous rate of technical change X

• KPC depends on… – Share s of new public capital NPK– Depreciation rates d– Regional labor supply LS

11

Urbanization ScenarioModerate increases in migration promote economic growth

• Baseline urbanization – Ethiopia: 15.5% to 21.1%– Uganda: 15.3% to 18.7%

• Now we add 10% points

• Strongest growth in urban industrial centers

• But agric. and rural areas also benefit from higher demand

Total GDP

Agriculture

Industry

Services

Rural areas

Towns

Cities

Sect

ors

Regi

ons

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

Ethiopia Uganda

Average annual change from baseline (%)

12

Urbanization ScenarioPercentage of poor in urban areas rises with increased migration

• Per capita welfare rises for both poor and non-poor households

• Poorer migrants reduce urban per capita welfare (returns to unskilled labor fall)

• Towns receive most internal migrants – so their average falls furthest

All

Poor

Non-poor

Rural areas

Small town

Major cities

Nati

onal

Regi

ons

-2.0 -1.0 0.0 1.0

Ethiopia Uganda

Average annual change from baseline (%)

13

Investment ScenariosSimulation design

• Raise share of public capital allocated to either cities, towns or rural areas by 10%

• Reallocation of existing resources– Increase budget allocation for target sector– Proportionately reduce allocation to other sectors

• Urban investment increases public capital (KPC) but reduces investment in agriculture

• Agriculture investment has a TFP-spending elasticity of 0.15 (causes agricultural output to increase/decrease for agric./urban sims)

Source: Dorosh and Thurlow (2012), “Can Cities or Towns Drive African Development? Economywide Analysis for Ethiopia and Uganda”.

14

Investment ScenariosEconomic growth

• Rural investment:– Slows national and

industrial growth

• Urban investment– Favors industry but

reduces agriculture

Total GDP

Agriculture

Industry

Services

Total GDP

Agriculture

Industry

Services

Ugan

daEt

hiop

ia

-1.5 -1.0 -0.5 0.0 0.5 1.0

Rural areas Towns Cities

Average annual change from baseline (%)

Additional investment in:

15

Investment ScenariosHousehold welfare

• Rural investment:– Significantly improves

national welfare, despite slower growth

– Benefits rural households (including poor rural)

• Clear trade-offs between growth and welfare objectives

National

Rural areas

Small town

Major cities

Poor

Non-poor

-0.30 -0.20 -0.10 0.00 0.10 0.20 0.30

Rural areas Towns Cities

Average annual change from baseline (%)

Uganda

Additional investment in:

Household group

17

Summary• Migration/agglomeration are potential sources of

growth

• Urbanization also reduces the rural-urban divide

• But without supporting investments, there is an “urbanization of poverty” and rising urban inequality

• We identify trade-offs to investing in urban areas (i.e., faster growth but deteriorating poor household welfare)

• The urban investments, even with agglomeration and migration effects, generate less poverty reduction than agricultural growth

18

Summary (2)The model simulation results suggest:

• There is a growth-equity tradeoff in public investment choices in African economies with high shares of GDP and poverty in rural areas.

• Urban infrastructure investments promote higher overall GDP growth.

• However, given productive investment opportunities in agriculture, shifting public expenditures towards agricultural productivity-enhancing investments reduces poverty more than allocating additional resources to urban investments.