Ethiopian Development Research Institute (EDRI) and International Food Policy Research Institue (IFPRI), Sevnth International Conference on Ethiopian Economy, EEA Conference Hall, Addis Ababa, June 24, 2010

1. ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTE Agglomeration, migration and rural-urban transformation in Ethiopia Paul Dorosh and James Thurlow IFPRI ESSP-II Ethiopian Economic Association Conference June 24, 2010 Addis Ababa 1

2. Overview Growth and internal migration in Ethiopia Regional economywide model Scenario 1: Baseline or “business-as-usual” growth Scenario 2: Accelerating urban migration Scenario 3: Reallocating public investment Summary and conclusions

3. Ethiopia: Economic Structure1999/00 – 2008/09 Source: Calculated from World Bank, World Development Indicators data. 3

4. Ethiopia: Urbanization 4 Ethiopia is urbanizing faster than people think!!!

5. Ethiopia: Alternative Urbanization Estimates 5

6. Ethiopia: Percent Population connected to Urban Agglomeration 6 Source: Schmidt and Kedir (2009)

7. Ethiopia: Development Budget 1999/00 and 2007/08 7 Source: Ministry of Finance and Economic Development data.

8. Agro-ecological Zones (AEZ’s): “3 Ethiopias” split into 5 AEZs Source: 2005/06 EDRI Social Accounting Matrix. 8

9. 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)

10. 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)

11. 2. Regional economywide model Basic structure of the economy Producers Rural areas Agriculture Consumers Migration National product market Households Towns Non-agriculture Cities Non-agriculture

12. 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)

13. 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 growth BUT endogenous migration (i.e., regional labor supply) Agglomeration economies in small towns & major cities: Based on labor supply and per capita public capital

14. 2. Regional economywide model Internal migration functions 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

15. 2. Regional economywide model Agglomeration and technical change 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:

16. 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)

17. 2. Regional economywide model Two sets of simulations Baseline or business-as-usual scenario Increasing current rural-to-urban migration rates Double, Triple, and Quadruple Reallocate 10% of existing public investment towards… Cities, Towns, or Rural areas

18. 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)

19. 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

20. 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

21. 4. Accelerating migration to major cities Results: Migration flows and urbanization Increase base-year migration rate to urban centers (m)

22. 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)

23. 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

24. 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

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

26. 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)

27. 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

28. 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.

29. 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