Economic Geography and Structural Change

TL;DR

This paper presents a model linking structural economic change with regional disparities, showing how productivity growth causes shifts from agriculture to industry and spatial concentration, reinforcing economic development.

Contribution

It introduces a novel analytical model with non-homothetic preferences to jointly analyze structural change and regional disparities during development.

Findings

Labor shifts from agriculture to industry with productivity growth

Regional disparities increase as industry concentrates spatially

Structural change and disparities mutually reinforce each other

Abstract

As countries develop, the relative importance of agriculture declines and economic activity becomes spatially concentrated. We develop a model integrating structural change and regional disparities to jointly capture these phenomena. A key modeling innovation ensuring analytical tractability is the introduction of non-homothetic Cobb-Douglas preferences, which are characterized by constant unitary elasticity of substitution and non-constant income elasticity. As labor productivity increases over time, economic well-being rises, leading to a declining expenditure share on agricultural goods. Labor reallocates away from agriculture, and industry concentrates spatially, further increasing aggregate productivity: structural change and regional disparities are two mutually reinforcing outcomes and propagators of the growth process.