Economic Growth, Size of the Agricultural Sector, and Urbanization

This paper exploits the significant positive response of the share of agricultural value added and GDP per capita growth to variations in the international prices for agricultural commodities and rainfall to construct instrumental variables estimates of the causal effect that changes in the size of the agricultural sector and GDP per capita growth have on the urbanization rate for a panel of 41 African countries during the period 1960-2007. The paper's two main findings are that: (i) decreases in the share of agricultural value added lead to a significant increase in the urbanization rate; (ii) conditional on changes in the share of agricultural value added GDP per capita growth does not significantly affect the urbanization rate. The empirical results confirm the predictions of theoretical models that economic shocks which differentially affect the return across sectors matter for the rural-urban migration decision, and that economic growth mostly affects the urbanization rate through a sector shift out of agriculture.