The Role of Productivity, Transportation Costs, and Barriers to Intersectoral Mobility in Structural Transformation

The process of economic development is characterized by substantial reallocations of resourcesacross sectors. In this paper, we construct a multi-sector model in which there are barriers to themovement of labor from low-productivity traditional agriculture to modern sectors. With the barrierin place, we show that improvements in productivity in modern sectors (including agriculture) orreductions in transportation costs may lead to a rise in agricultural employment and through terms-oftradeeffects may harm subsistence farmers if the traditional subsistence sector is larger than a criticallevel. This suggests that policy advice based on the earlier literature needs to be revised. Reducingbarriers to mobility (through reductions in the cost of skill acquisition and institutional changes) andimproving the productivity of subsistence farmers needs to precede policies designed to increase theproductivity of modern sectors or decrease transportation costs.