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STEG Working Paper

Macroeconomic Development, Rural Exodus, and Uneven Industrialization

Tomás Budí Ors and Josep Pijoan-Mas

Economic development and industrialization are typically led by a few regions within a country. The initially agrarian regions may catch up and industrialize - as in the U.S. 1880 to 1940 - or they may fail to industrialize, experience a population exodus, and help industrialization elsewhere - as in Spain 1940 to 2000. To understand the emergence and consequences of each pattern, we build a simple model of structural change with multiple locations and sectors where both internal migration and internal trade are costly. In the model, internal migrations change the relative demand across sectors and hence act as a force of within-region structural change. We calibrate the model to the development experience of Spain, and find that its large rural exodus and uneven industrialization were originated by a combination of increased economic opportunities in more industrial regions together with a decline in migration costs towards them. More importantly, the rural exodus in Spain completely explains the lack of industrialization in laggard areas. This is because manufactures in those regions were largely dependent on the vanishing local demand and because the most advanced regions managed to lever up their industrial comparative advantage thanks to the massive inflow of cheap labor. The rural exodus also accelerated growth and structural change at the aggregate level thanks to a better allocation of labor across locations.