Dual-Economy Growth, Trade, and Development
Total Page:16
File Type:pdf, Size:1020Kb
STRUCTURAL CHANGE AND INCOME DIFFERENCES by Trevor Tombe A thesis submitted in conformity with the requirements for the degree of Doctor of Philosophy Graduate Department of Economics University of Toronto Copyright c 2011 by Trevor Tombe Abstract Structural Change and Income Differences Trevor Tombe Doctor of Philosophy Graduate Department of Economics University of Toronto 2011 Economic growth and development is intimately related to the decline of agriculture’s share of output and employment. This process of structural change has important implications for income and pro- ductivity differences between regions within a country or between countries themselves. Agriculture typically has low productivity relative to other sectors and this is particularly true in poor areas. So, as labour switches to nonagricultural activities or as agricultural productivity increases, poor agriculturally- intensive areas will benefit the most. In this thesis, I contribute to a recent and growing line of research and incorporate a separate role for agriculture, both into modeling frameworks and data analysis, to examine income and productivity differences. I first demonstrate that restrictions on trade in agricultural goods, which support inefficient domestic producers, inhibit structural change and lower productivity in poor countries. To do this, I incorporate multiple sectors, non-homothetic preferences, and labour mobility costs into an Eaton-Kortum trade model. With the model, I estimate productivity from trade data (avoiding problematic data for poor countries that typical estimates require) and perform a variety of counterfactual exercises. I find im- port barriers and labour mobility costs account for one-third of the aggregate labour productivity gap between rich and poor countries and for nearly half the gap in agriculture. Second, moving away from international income differences, I use a general equilibrium model of structural transformation to show a large labour migration cost between regions of the US magnifies the impact improved labour markets have on regional convergence. Finally, I estimate the influence of structural change on convergence between Canadian regions. I construct a unique dataset of census-division level wage and employment levels in both agriculture and nonagriculture between 1901 and 1981. I find convergence is primarily due to region-specific factors with structural change playing little role. ii Acknowledgements I thank Xiaodong Zhu, Diego Restuccia, and Gueorgui Kambourov, for their extremely valuable guid- ance and supervision over the past few years. I would also like to express thanks to those who con- tributed with insightful comments, suggestions, and encouragements at various stages of this thesis: Tasso Adamopoulos, Michelle Alexopoulos, Mickael Baker, Bernardo Blum, Branko Boskovic, Loren Brandt, Jay Cao, Margarida Duarte, Andres Erosa, Berthold Herrendorf, Ignatius Horstmann, Sacha Kapoor, Mara Lederman, Peter Morrow, Joanne Roberts, Andrés Rodríguez-Clare, Richard Roger- son, Aloysius Siow, Kitty Wang, and Jennifer Winter. I also thank the various seminar participants at Penn State, Simon Fraser, Toronto, Wilfrid Laurier, and York, along with conference participants at the Canadian Economics Association 2009 and 2010 Meetings, Econometric Society North American 2009 Summer Meeting, Midwest Macroeconomics 2010 Meeting, and Tsinghua’s 2010 Macroeconomics Workshop, for many helpful comments. iii Contents 1 The Missing Food Problem 1 1.1 Introduction . 2 1.2 A Model Consistent with Stylized Facts . 8 1.2.1 Households’ Problem . 9 1.2.2 Production Technology . 9 1.2.3 International Prices and Trade Patterns . 10 1.2.4 Labour Market and Trade Balance Conditions . 11 1.2.5 Equilibrium Definition and Solving the Model . 12 1.3 Calibrating the Model . 13 1.3.1 Productivity and Trade Costs . 15 1.3.2 Subsistence, Service Sector Productivity, and Labour Market Distortions . 19 1.4 Results from the Baseline Calibration . 19 1.4.1 Trade Cost Estimates . 20 1.4.2 Sectoral Labour Productivity . 21 1.5 Counterfactual Experiments: Trade, Productivity, and Income . 23 1.5.1 International Food Trade Flows . 24 1.5.2 Cross-Country Productivity Gaps . 25 1.5.3 Decomposition: Cross Country Aggregate Productivity and Income Variation . 26 1.6 Discussion and Robustness of Results . 27 1.6.1 Alternative Values for q ............................. 27 1.6.2 Alternative Counterfactual Experiments . 28 1.6.3 Plausibility of Trade Cost Estimates . 28 1.6.4 Implications for Price Differentials . 30 1.6.5 OECD Agricultural Producer Support . 31 1.6.6 Actual Development Experiences . 32 1.7 Conclusion . 32 2 Regions, Frictions, and Migrations 47 2.1 Introduction . 48 2.2 Empirical Patterns, by Region . 50 iv 2.3 The Model . 51 2.3.1 Firms . 51 2.3.2 Households . 53 2.3.3 Market Clearing Conditions . 55 2.4 Calibration . 55 2.5 Counterfactual Experiments . 58 2.5.1 Labour Market Frictions . 58 2.5.2 Goods Market Frictions . 60 2.6 Discussion . 61 2.6.1 Effects of Transportation and Migration Costs . 61 2.6.2 Calibration of Transportation Cost Parameter . 61 2.6.3 Calibration of Peripheral Labour Market Frictions . 62 2.6.4 Calibration of Between-Region Migration Costs . 63 2.6.5 Alternative Productivity Calibration . 65 2.7 Conclusion . 66 3 Structural Change and Canadian Convergence 70 3.1 Introduction . 71 3.2 Convergence Decomposition . 72 3.2.1 Core vs. Peripheral Classification . 73 3.3 Data . 73 3.3.1 Variable Construction . 74 3.4 Results . 76 3.5 Discussion and Sensitivity of Results . 79 3.5.1 Direct Comparison to US Experience . 79 3.5.2 Exclusion of Western Provinces . 82 3.5.3 Alternative Regional Classifications of Census-Divisions . 86 3.5.4 Agricultural Employment Definition . 86 3.6 Concluding Remarks . 89 Bibliography 99 v List of Tables 1.1 Calibration of Model Parameters . 15 1.2 Main Estimation Results . 17 1.3 Selected Values from Stage-1 Calibration . 18 1.4 Aggregate Productivity and Employment Shares, Model vs. Data . 21 1.5 Baseline Model: Cross Country Productivity Differentials . 22 1.6 Trade Between 1st and 4th Quartiles . 24 1.7 Results of Main Counterfactual Experiments . 25 1.8 Counterfactual Aggregate Productivity Gaps, with Fixed Labour Allocations . 26 1.9 Contribution to Productivity Gaps, Various q ...................... 27 1.10 Counterfactual Productivity Gaps, Various Experiments . 29 1.11 Counterfactual Productivity Gaps, Full Liberalizations . 30 1.12 Relative Productivity and Trade Estimates . 34 2.1 Calibration of Model Parameters . 56 2.2 Calibration Performance vs. Data . 58 2.3 Isolating the Effect of Labour Market Improvements . 59 2.4 Isolating the Effect of Transportation Cost Reductions . 60 2.5 Model Performance under Various Migration Cost Assumptions . 64 2.6 Average Annual Growth Rates of Key Variables, 1880-1990 . 65 3.1 Key Statistics of the Data . 74 3.2 Convergence Decompositions . 78 3.3 Results from Table 2 of Caselli and Coleman [2001] . 79 3.4 Convergence Decompositions (US Data from Caselli and Coleman [2001]) . 80 3.5 Selected Comparison of US and Canadian Experience . 81 3.6 Key Features of the Data - West Excluded . 84 3.7 Convergence Decompositions - Excluding the West . 85 3.8 Labour Force Shares - With Farm Operators . 86 3.9 Classifications of All 1901-1981 Census Divisions (P=Peripheral, C=Core) . 90 3.10 Agricultural Employment Share - With Operators . 95 3.11 Annual Earnings, By Occupational Group, in Dollars . 95 3.12 Convergence Decompositions - Including Farm Operators . 96 3.13 Selected Earnings and Employment Share Data . 97 3.14 List of Key Variables for Decomposition . 98 vi List of Figures 1.1 The Food Problem in Poor Countries . 3 1.2 Agricultural Import Share of GDP, by Country . 4 1.3 Fit of the Stage-1 Calibrated Model . 18 1.4 The Role of Subsistence Food Requirements . 20 1.5 Normalized Import Shares: No Import Barriers . 37 1.6 Normalized Import Shares: No Labour Mobility Costs . 38 1.7 Normalized Import Shares: No Import Barriers or Labour Mobility Costs . 39 1.8 Counterfactual Gains in GDP/Worker . 39 1.9 Real Output-per-Worker in Agriculture Relative to Manufacturing . 40 1.10 Agricultural Labour Productivity, Model Estimates vs. Data . 40 1.11 Trade Cost Estimates for Agricultural Goods . 41 1.12 Trade Cost Estimates for Manufactured Goods . 42 1.13 Competitiveness Measure for Agriculture . 43 1.14 Competitiveness Measure for Manufacturing . 43 1.15 Import Shares of Poorest Countries, by Source Country Percentile . 44 1.16 Import Shares of Richest Countries, by Source Country Percentile . 44 1.17 Increasing S-S Trade, Following Full Removal of.