The evolving role of the rural economy in the process of economic development

The functions of urban and rural regions change through the various stages of economic development. The economic development process has often been characterised in terms of stages of growth, where a national economy evolves from a narrow economic base that has weak connectivity to a complex structure that has strong internal markets and is well integrated into the global economy (Rostow, 1960; Rodrik, 2003). As national development takes place, it is through an economic and demographic transformation of rural and urban territory. An important feature of this growth process is the evolving function of urban and rural regions within the country (Box 2.3).

At the earliest stages of development, rural activities in agriculture and natural resources are dominant. The vast majority of population and economic activity is rural, with urban places serving as market and supply points and with a few coastal centres serving as export and import terminals. Over time, the national economy evolves to include more urbanisation that is based initially on first-stage processing of rural products and the local production of inputs for resource-based industries. The increase in domestic value added allows further expansion, diversification and urbanisation of the economy. Urban and rural economies become tightly coupled and effectively form a single supply chain.

As urban economies continue to grow in size they begin to decouple from the rural economy and develop an internal market complementing rural activities. As the national economy shifts from rural-led growth to urban-led growth, population begins to concentrate in cities, especially larger cities where manufacturing and the service sectors provide increasing amounts of income and employment. The share of rural production in gross domestic product (GDP) and employment begins to fall rapidly, even though the volume and value of resource-based activity continues to expand and its share in exports remains strong. As development advances, the process of urbanisation introduces activities less dependent on rural production, which results in diversification and increased stability. Urban and rural economies become more complementary activities.

Box 2.3. An extension of Rostow’s Stages of Growth model

Rostow’s Stages of Growth model of the stages of national development can be recast to identify four basic strategies for rural policy depending on the level of national development. The various stages of growth or national development are associated with differing rural conditions. In a sense, there is an evolution of the rural economy that parallels the evolution of the national economy.

  • • First, increase role of markets: foster connectivity, support price discovery mechanisms, provide basic infrastructure (low-income developing countries mainly in Africa).
  • • Second, build local capacity: increase productivity through investments in firms and people, encourage urban migration (medium income developing countries - Eastern Europe).
  • • Third, broaden local economic base by adding manufacturing, tourism and other new sectors: complete transition from subsistence to market economy (some OECD member countries including Chile, Mexico and Turkey, as well as non-members such as Columbia).
  • • Fourth, improve integration with urban economy in peri-urban territory and improve service delivery in more remote territory (most OECD member countries).

At a subsequent stage of development, rural regions become more diversified. Through greater concentration of production and people in urban areas, production costs increase accordingly. This induces some firms to seek lower cost locations in rural regions. The outflow of firms from urban areas provides diversification benefits in rural regions and reduces congestion costs in urban regions by retaining people in rural regions and thereby reducing urban housing costs. In addition, firms that may have become uncompetitive in a higher cost urban environment can continue to earn positive profits in a rural location.

Even at the most advanced stages of development, a considerable share of the urban economy depends upon a direct connection to rural activities. In advanced stages, the bulk of the population and economic activity occur in the most urbanised regions. However, these regions are tightly coupled to rural regions by transport and communication networks. Urban regions become more specialised in advanced services and less so in tradable activities. Importantly, while urban regions have large internal or home markets, a considerable share of the economic activity that takes place in an urban setting has as its ultimate consumer a rural household or firm. For example, an export trading firm in Santiago acts on behalf of a fruit processor in a rural region. Similarly, the corporate headquarters for major mining and forestry companies are in urban centres, but the actual minerals and timber are in rural areas.

Due to Chile’s remarkable growth performance over the past decades, its economy maps into the latter stages of development. The stages of development framework is also consistent with the development advice offered by the World Bank in the 2009 World Development Report (Reshaping Economic Geography) focusing on the first two stages. In turn, OECD reports (2006, 2009a, 2009b) focus on the latter two stages. Similarly, Kuznets’ “inverted U” description of the path of inequality may also be relevant for Chile. Kuznets hypothesised that at a low stage of development, income inequality is low because the majority of the population is poor. As development takes place, wealth and income become concentrated in a number of leading sectors and in the hands of those in the leading sectors. The result is a high level of income inequality at moderate stages of development. But as the economy becomes more advanced, the vast majority of the population benefits from modernisation and as incomes rise, inequality declines once again. If Kuznets is correct, Chile can now afford to make investments in rural and urban areas that allow all citizens to participate in the modernisation process.

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