Beyond Dualism: Agricultural Productivity, Small Towns, and Structural Change in Bangladesh

Emran, M. Shahe and Shilpi, Forhad (2017): Beyond Dualism: Agricultural Productivity, Small Towns, and Structural Change in Bangladesh.

Abstract

This paper uses a framework that goes beyond rural-urban dualism and highlights the role of small town economy (STE) in understanding structural change in a rural economy such as Bangladesh. It provides a theoretical and empirical analysis of the role of agricultural productivity in structural transformation in the labor market, with a focus on the differences between a village economy and a small town economy. The empirical work is based on a general equilibrium model that formalizes the demand and labor market linkages: the STE draws labor away from the rural areas to produce goods and services whose demand may depend largely on rural income. The theory clarifies the role played by the income elasticity of demand and the elasticity of wage with respect to productivity increase in agriculture. For productivity growth to lead to a demand effect, the elasticity of wage has to be lower than a threshold. When the demand for goods and services produced in small towns comes mainly from the adjacent rural areas, the demand effect can more than offset the negative wage effect, and lead to higher labor allocation to the production of town good. Using rainfall as an instrument for agricultural productivity, the empirical analysis finds a significant positive effect of agricultural productivity shock on rice yield and agricultural wages. The evidence shows that productivity shock increases wages more in the rural sample when compared to the STE sample. But structural change in employment is more pronounced in the STE sample. In the rural sample, it increases employment only in small scale manufacturing and services. In contrast, a positive productivity shock has large and positive impacts on employment in construction and transport, education, health and other services, and manufacturing employment in larger scale enterprises located in small towns and cities. Agricultural productivity growth is found to induce structural transformation within the services sector in small towns, with employment in skilled services growing at a faster pace than that of low-skilled services.

• Item Type: MPRA Paper
• Language: English
• Keywords: Agricultural Productivity, Small Town Economy, Dualism, Employment in Large Firms, Employment Growth, Structural Transformation
• Subjects: D - Microeconomics > D5 - General Equilibrium and Disequilibrium; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O12 - Microeconomic Analyses of Economic Development

References

Adhvaryu, A., A. V. Chari and S. Sharma. 2013, “Firing Costs and Flexibility: Evidence from Firms' Employment Responses to Shocks in India,” Review of Economics and Statistics, vol. 95, no.3.

Bandyopadhyay, Sushenjit & Skoufias, Emmanuel, 2012. "Rainfall variability, occupational choice, and welfare in rural Bangladesh,"Policy Research Working Paper Series 6134, The World Bank.

Bhowmik, A, K, and Ana Cristina Costa (2012). A Geostatistical Approach to the Seasonal Precipitation Effect on Boro Rice Production in Bangladesh, International Journal of Geosciences, 2012, 3, 443-462

Brückner, Markus, 2012. "Economic growth, size of the agricultural sector, and urbanization in Africa," Journal of Urban Economics, vol. 71(1), pages 26-36.

Brückner, Markus and Antonio Ciccone, 2011."Rain and the Democratic Window of Opportunity," Econometrica, vol. 79(3), pages 923-947, 05.

Bustos, Paula, Bruno Caprettini and Jacopo Ponticelli, 2016. "Agricultural Productivity and Structural Transformation: Evidence from Brazil," American Economic Review, American Economic Association, vol. 106(6), pages 1320-65, June.

Chenery, H., Robinson, and M. Surquin (1986) Industrialization and Growth: A Comparative Study (Oxford: Oxford University Press)

Chernozhukov, V and C, Hansen (2008), “The Reduced Form: A Simple Approach to Inference with Weak Instruments”, Economics Letters, 2008, 100(1), 68-71.

Christiaensen, Luc & De Weerdt, Joachim & Todo, Yasuyuki, 2013."Urbanization and poverty reduction -- the role of rural diversification and secondary towns," Policy Research Working Paper Series 6422, The World Bank.

Deichmann, U., F. Shilpi, and R. Vakis. 2009. “Urban Proximity, Agricultural Potential and Rural Non-farm Employment: Evidence from Bangladesh,” World Development, 37(3), p. 645-660.

Dudwick, Nora, Katy Hull, Roy Katayama, Forhad Shilpi and Kenneth Simler, 2011."From Farm to Firm : Rural-Urban Transition in Developing Countries," World Bank Publications,The World Bank, number 2307, April.

Emran, M. Shahe and Forhad Shilpi, 2012."The extent of the market and stages of agricultural specialization," Canadian Journal of Economics, Canadian Economics Association, vol. 45(3), pages 1125-1153, August.

Fafchamps, M. and F. Shilpi, 2003, “Spatial Division of Labor in Nepal,"{} Journal of Development Studies, Vol. 39, No. 3, pp. 23-66.

Fafchamps, Marcel, and Forhad Shilpi, 2005. “Cities and Specialization: Evidence from South Asia.” Economic Journal,Vol. 115, April.

Ferre, Celine & Ferreira, Francisco H.G. & Lanjouw, Peter, 2010."Is there a metropolitan bias? The inverse relationship between poverty and city size in selected developing countries" Policy Research Working Paper Series 5508, The World Bank.

Foster, A. and M. Rosenzweig, 2004, “Agricultural development, industrialization and rural inequality," mimeographed, Harvard University.

Goletti, F., Ahmed, R., and Farid, N. (1995). Structural Determinants of Market Integration: The Case of Rice Markets in Bangladesh. The Developing Economics, 33(2), 185-202.

Griliches, Z. 1963. The sources of measured productivity growth: U.S. agriculture,1940--1960. Journal of Political Economy, 81 (4): 331--46.

Haggblade, S., P. Hazell and T. Reardon, 2006, Transforming the Rural Nonfarm Economy, Johns Hopkins Press, Baltimore.

Harris, John and Michael Todaro (1970). "Migration, Unemployment, and Development: A Two Sector Analysis," American Economic Review, 40: 126-142.

Hossain, M. and A. Bayes, 2009, Rural Economy and Livelihoods:\Insights from Bangladesh, AH Development Publishing House.

Hossain, Mohammad Ismail, and Wim Verbeke. 2010. “Evaluation of Rice Markets Integration in Bangladesh.”\Lahore Journal of Economics 15 (2): 77--96.

Hymer, Stephen and Stephen Resnick (1969), “A Model of an Agrarian Economy with Nonagricultural Activities”, American Economic Review, Vol. 59, No. 4, Part 1 (Sep., 1969), pp. 493-506

Johnson, D.G, 2000, “Population, Food and Knowledge", American Economic Review, Vol. 90(1), p.1-14.

Kuznets, S. (1973) `Modern economic growth: findings and reflections' (Nobel Lecture), American Economic Review 63, 247--58.

Lanjouw, Peter and Rinku Murgai, 2009."{}Poverty decline, agricultural wages, and nonfarm employment in rural India: 1983-2004,"{} Agricultural Economics, vol. 40(2), pages 243-263, 03.

Lanjouw J. and P. Lanjouw, 2001, “Rural Non-farm Employment: Issues and Evidence from Developing Countries,” Agricultural Economics, vol. 26, no. 1, pp.1 --24.

Lewis, A. (1954) `Economic development with unlimited supplies of labor,' Manchester School 22, 139--91

Matsuyama, K (2008), "Structural Change," in Steven N. Durlauf and Lawrence E. Blume, eds., The New Palgrave Dictionary of Economics, 2 ed., Palgrave Macmillan, 2008. 110

Mellor, J, 1976, The New Economics of Growth: A Strategy for India and the Developing World, Cornell University press, Ithaca.

Ranis, G. and F. Stewart, 1973. “Rural Non-Agricultural Activities in Development: Theory and Application.” Journal of Development Economics, vol. 33, o.7 pp. 1045-1060.

Renkow, M., 2006, “Cities, towns and the rural nonfarm economy,"{} in Haggblade, S., P. Hazell and T. Reardon (eds), Transforming the Rural Nonfarm Economy, Baltimore: Johns Hopkins University Press.

Rodriguez-Clare, Andres, 1996."The division of labor and economic development," Journal of Development Economics, Elsevier, vol. 49(1), pages 3-32, April.

Sarker, M. A. R., Alam, K., and Gow, J. (2012). Exploring the relationship between climate change and rice yield in Bangladesh: An analysis of time series data. Agricultural System, pp. 11-16.