Rural-Urban Interactions in Economic Development: A Two-Sector Model for Bangladesh

Abstract

In the present study, a neoclassical general equilibrium model is developed to study the dualistic economic development of a predominantly agrarian economy, Bangladesh. Quantitative analysis is undertaken in order to make assessments of several development strategies within the framework of the model. The linkages between the agricultural (rural) and the manufacturing (urban) sectors via the output and labour markets are incorporated in the model and empirical analysis. In specifying the aggregate relations in the model especially those of the rural sector, the analysis is based on the microeconomic relations of a 'representative peasant household'. The approach is to first estimate the structural parameters of the model (simultaneous system) and then to perform simulation exercises. These simulations permit us to move beyond the restrictions of growth theory, since the direction of influences on different variables and their quantitative dimensions may be assessed. The aim is to determine the differential impact of exogenous investments and related public policy measares on the two sectors, especially on the level of employment, output and wages. Within a disequilibrium growth process which allows for differences in wages in the two sectors, the impact of rural-urban migration of people on the economy of Bangladesh and its policy implications are assessed. The policy simulations suggest that strategies which favour agricultural rather than industrial development have a more positive impact on output, employment, and the reduction of rural-to-urban migration of people.