Economy-wide Analysis for Ethiopia and Uganda
The relative importance of agriculture versus industry in African development remains a major area of both academic and policy debate, informing the allocation of aid and other resources across rural areas, towns and cities, while Africa is rapidly urbanizing.
We examine whether urban agglomeration economies significantly alter the debate over the potential drivers of Africa’s structural transformation. More specifically, we develop an economy-wide model that captures the benefits from urbanization.
We apply the models to data for Ethiopia and Uganda––two agriculture-based African countries that have much in common with the rest of low-income Africa, and where urban development is central to the policy debate.
We conclude that while urban agglomeration provides an additional argument against an ‘agro-fundamentalist’ approach to African development, the shorter-term political and socioeconomic imperative to reduce poverty still supports further investment in African agriculture.
The development literature often provides conflicting recommendations to African countries. On the one hand, governments are encouraged to direct physical and financial resources towards urban industrialization, in part to harness the agglomeration effects brought about by concentrating economic activity in specific geographic locations.
On the other hand, governments have for a long time been told that agriculture has strong growth linkages, both within rural areas and national economies. Investing in agriculture may therefore generate large economy-wide multiplier effects―as is said to have occurred during Asia’s green revolution. While urban and rural development are not necessarily mutually exclusive, a scarcity of public resources, and the need to meet both short- and long-term development objectives, implies that trade-offs between rural and urban investments are expected.
The relative importance of agriculture versus industry in African development remains a major area of academic as well as policy debate. This debate is crucial since it informs the allocation of foreign development assistance across rural areas, towns and cities at a time when Africa is rapidly urbanizing. The subject of the debate is also crucial for African governments who routinely allocate scarce resources across competing development objectives.
For example, Uganda’s government must decide how best to reallocate resources away from southern regions towards post-conflict northern cities and rural areas. Similarly, Ethiopia’s government limits urban migration through its land tenure policies, but must weigh this policy against the benefits of urban development.
At its broadest level, the academic debate hinges on whether the traditional development models that sought to explain the drivers and process of structural transformation are still relevant for Africa. Early dual economy models viewed non-agriculture as the dynamic sector that draws surplus farm workers into more productive jobs. Agricultural growth was seen as necessary to prevent rising food prices and wages from slowing industrialization.
Subsequent models attributed a more active role to agriculture given its industrial production linkages and its household consumption linkages, particularly within rural economies. For those who some call ‘agro-fundamentalists’, these models still provide the core justification for an agriculture-led growth strategy in Africa. Agriculture is also seen as a direct link to poorer Africans given their dependence on farm-based livelihoods.
The traditional models face two major criticisms. First, integrated global markets mean that countries might be able to use food imports rather than domestic production to support industrialization. Second, the sources of growth are not explicitly identified in traditional models making it difficult to determine which sectors drive structural transformation. In this regard, African agriculture has yet to demonstrate that it is able to generate productivity gains like those experienced in Asia’s green revolution.
Counter-arguments contend that a reliance on food imports would weaken inter-sectoral growth linkages and widen the rural-urban divide. Moreover, African agriculture’s historically poor performance might reflect long-term underinvestment in the sector rather than its growth potential.
The above arguments focus on agriculture itself and are well-trodden areas of the debate. An area that receives less attention is the benefits from urban agglomeration economies and the growing interest in new economic geography. From this perspective, economic growth accelerates when resources or activities concentrate within geographic areas. Urbanization and industrial localization can generate positive externalities by situating producers closer to labour markets and customers, as well as to each other.
Urban agglomeration could therefore generate the productivity gains required to drive structural transformation. Agglomeration economies were not explicitly considered in traditional models and so might provide an additional argument in favour of directing resources towards industries in major cities and towns.
However, over the short-term, investing in major cities does little to address national poverty. Agricultural growth is found to be a more effective means of reaching the poor, albeit at the cost of slower national growth. Given these trade-offs, we conclude that while urban agglomeration does provide an argument against an ‘agro-fundamentalist’ approach to African development, the shorter-term political and socioeconomic imperative of reducing poverty supports further investment in African agriculture.
To examine these trade-offs, we developed a dynamic economy-wide model in this paper. We examine whether urban agglomeration economies significantly alter the debate over the potential drivers of Africa’s structural transformation. More specifically, we develop an economy-wide model that captures the benefits from urbanization.
Unlike most models, ours is designed to capture both traditional and new elements of the rural-urban debate, including sub-national growth linkages, internal migration, and agglomeration and congestion effects. It distinguishes between rural areas, small towns and major cities. It captures rural-urban production and consumption linkages as well as international trade including food imports, thereby incorporating many of the arguments for or against agriculture.
We apply the models to data for Ethiopia and Uganda―two agriculture-based African countries that have much in common with the rest of low-income Africa, and where urban development is central to the policy debate. The models are used to simulate the effects of accelerated urbanization, and the growth and poverty impacts (and trade-offs) of reallocating public investment between rural areas, towns and major cities.
Simulation results indicate that urbanization and agglomeration economies are important sources of economic growth and could be drivers of long-term structural transformation in Africa. It also has the potential to reduce the rural-urban divide. This is especially true in Uganda, where the industrial sector has stronger linkages to rural agriculture. However, without supporting investments in urban growth and job creation, there is likely to be an ‘urbanization of poverty’ in both Ethiopia and Uganda.
Rising urban poverty could prevent the use of large-scale rural-to-urban transfer programmes aimed at offsetting the decline in agricultural growth from reallocating away from rural areas. As such, our findings suggest that, at least over the short-term, investing in cities is unlikely to adequately address national poverty concerns.
In contrast, agricultural growth is a more direct and effective means of reaching the poor in the short run, but it comes at the cost of slower national growth and with possible long-term implications for the rate of structural transformation.
Given these trade-offs, we conclude that while urban agglomeration provides an additional argument against an ‘agro-fundamentalist’ approach to African development, the shorter-term political and socioeconomic imperative to reduce poverty still supports further investment in African agriculture.