Rural-urban interdependence, structural change, and development

- Capital accumulation is introduced into a model with rural-urban interdependence.
- The interdependence causes a poverty trap, stagnation, and unbounded growth.
- Capital accumulation and structural change are realized simultaneously.
- The timing of structural change is endogenously determined.

This paper presents a model of development that explicitly incorporates the interaction between rural agriculture and urban non-agriculture explored by Murata (2002). The increase of capital stock leads to capital intensive agriculture and the reallocation of labor from agriculture to non-agriculture. People who migrate to urban areas create new intermediate goods and enhance non-agricultural productivity, which, in turn, causes capital accumulation and capital intensive agriculture. This mechanism causes a poverty trap, stagnation, and unbounded growth.